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INSURANCE 


A  TEXT-BOOK"    ' 


A    COMPILATION   OF    THE    ADDRESSES    DELIVERED    BEFORE 
THE    TWENTY-NINTH    SESSION    OF    THE   NATIONAL 
CONVENTION    OF    INSURANCE    COMMISSION- 
ERS,   HELD    AT    MILWAUKEE,    WIS- 
CONSIN,   SEPTEMBER    13-16, 
1898 


Compiled  by 

WILLIAM  A.  FRICKE 


published  for 
The  National  Convention  of  Insurance  Commissioners 


6\ 


^0^ 


CONTENTS. 


PREFACE 3  4 

CHAPTER  I. 
LIFE  INSURANCE. 

A  REVIEW  OF  LIFE  INSURANCE  : 

John  A.  McCall,  President,  New  York  Life  Ins.  Co.  9-67 

LIFE  INSURANCE  IN  ITS  RELATIONS  TO  THE 
PUBLIC  : 
John  M.  Pattison.  President,  Union  Central  Life 

Ins.  Co 08-87 

GENERAL     PLANS,    RESERVES    AND     INVEST- 
MENTS : 
Emory  McClintock,  Actuary,  Mutual  Life  Ins.  Co., 

N.  Y 88-130 

Walter  S.  Nichols,  Editor,  Insurance  Monitor,  N.  Y. ,     1 30-1 50 

SPECIAL  FEATURES,  DIVIDENDS,  SURRENDER 
VALUES,  Etc.  : 
Jacob  L.   Greene,  President,  Connecticut  Mutual 

Life  Ins.  Co 151-178 

John  B.  Lunger,  Managing  Actuary,  New  York 

Life  Ins.  Co 178-211 

INDUSTRIAL  INSURANCE  : 

John  R.   Hegeman,   President,  Metropolitan  Life 

Ins.  Co..  N.  Y.         .        .  .  212-277 


Ulkl] 


\ 


6 

MORAL  HAZARD  IN  LIFE  INSURANCE  : 

Joseph  A.  DeBoer,  Actuary,  National  Life  Ins.  Co., 

Vermont  278-810 

ARE  NON-FORFEITURE  LAWS  EXPEDIENT  ? 

David  Parks  Fackler,  Actuary,  N.  J.  Dep't.  .  811-329 

Wm.  D.  Whiting,  Actuary,  Maine  Dep't.       .  329-385 
John  B.  Lunger,  Managing  Actuary,  New  York 

Life  Ins.  Co 835-341 

S.  H.  Wolfe,  Actuary,  Connecticut  Dep't.      .        .  342-354 

ASSESSMENT  LIFE  INSURANCE. 
ITS  BEGINNtNG,  DEVELOPMENT  AND  FUTURE  : 

George  Dyre  Eldridge, 355-401 

LEGISLATIVE,     ACTURIAL    AND     OFFICIAL 
TREATMENT : 
L.  G.  Fouse,  President  Fidelity  Mutual  Life  As- 
sociation, Phila 401-442 

FRATERNAL  INSURANCE : 

Adam  Warnock,  Supreme  Sec'y  American  Legion 

of  Honor 442-452 

DISCUSSION : 

Wm.  D.  Whiting,  Consulting  Actuary,  N.  Y.  City      452-466 
Frederick    A.     Betts,    Insurance    Commissioner, 

.Conn 466-478 

Milo  D.  Campbell,  Insurance  Commissioner,  Mich.      479-484 
William  A.  Fricke,    Commissioner  of  Insurance, 

Wig 484-487 

HOW  TO    EXAMINE  A  LIFE  INSURANCE  COM- 
PANY. 
Wm .  D .  Whiting,  Consulting  Actuary,  N .  Y .  City.      488-510 
Bradford  K.  Durfee,  ExSupt.  of  Insurance,  111.  .      510-512 


7 

CHAPTER  II. 
FIRE  INSURANCE. 
FIRE  INSURANCE  : 

Judge  D.  Ostrander,  Chicago         ....      515-549 

FIRE  INSURANCE  RATES: 

A.  F.    Dean,  Asst.    Mgr.,    Springfield,  F.   &  M. 

Ins.  Co.  at  Chicago 550-583 

J.   Mabbett  Brown,    Supt.    Milwaukee  Board  of 

Fire  Underwriters  .         .         .         .         .      583-592 

RE-INSURANCE  RESERVE  OF  FIRE  INSURANCE 
COMPANIES: 
Thomas  S.  Chard,  M'gr.  Firemen's  Fund  Ins.  Co. 

*at  Chicago 593-630 

F.  C.  Moore,  President,  Continental  Fire  Ins.  Co. 

N.  Y 630-637 

THE  FOREIGN  FIRE  INSURANCE  COMPANY  AND 
ITS  BUSINESS  METHODS  : 
E.  F.  Beddall.  U.    S.    Manager,  Royal  Ins.    Co.      638-776 
Elijah  R.   Kennedy,  U.  S.  Mgr.    Alliance  Assur- 
ance,  Baloise,    Helvetia,    Swiss,  Netherlands, 
and  Svea  Fire  Ins.  Co's  ....       776-793 

Henry  H.    Hall,  U    S.    Manager,  Law  Union  and 

Crown,  and  Union  Assurance  Society     .         .       793-801 
Elmer  H.  Dearth,  Insurance  Commissioner,  Minn.       801-825 

THE   OBJECT  AND  PURPOSE   OF  UNIONS,  AND 
ASSOCIATIONS  OF  FIRE  UNDERWRITERS  : 

R.  J.  Smith,  Sec'y,  The  Traders'  Ins.  Co..  Chicago     826-835 
T.  H.  Lenehan,  Pres't.  Fire  Underwriters'  Associa- 
tion of  the  North  We?t  .         .         .       835-846 
E.  T.  Orear,  Supt.  of  Insurance,  Mo.  .         .      846-857 


■  f 


8 


THE  INCONSISTENCIES  OF  FIRE  INSURANCE 

LEGISLATION : 
W.  H.  Mylrea,  Attorney  General  of  Wisconsin     .     858-888 

HOW  TO  EXAMINE    A  FIRE  INSURANCE  CO.: 

J.   J.    Brinkerhofif,    Actuary,    Illinois  Dep't.      .      889-911 

CHAPTER  III. 
CASUALTY  INSURANCE,  CORPORATE  SURETYSHIP,  Etc. 

ACCIDENT  INSURANCE  : 

Edson  S.  Lott,  Sec'y  U.  S.  Casualty  Company, 

N.  Y 915-928 

EMPLOYERS'  LIABILITY  INSURANCE : 

W.  F.  Moore,  VicePres't.  &  Gen'l  Mgr.  U.  S. 

Casualty  Co.,  N.  Y 929-971 

CORPORATE  SURETYSHIP  : 

Edwin  Warfleld,  Pres't,  Fidelity  and  Deposit  Co., 

Baltimore,   Md 972-999 

THE    STATE    AND     CASUALTY     INSURANCE  : 
Geo.  F.  Seward,  Pres't,  Fidelity  and  Casualty  Co., 

N.  Y.    .        .        .  *     •        .        .        .        .  1000-1021 

INSURANCE  AND  THE  LEGISLATOR  : 

Julius  E.   Roehr,   Chairman,  Senate    Committee 

on  Insurance,  Wisconsin.         ....  1022-1051 

THE  POSSIBILITIES  OF  NATIONAL  SUPERVISION  : 

John  A.  Finch,  Att'y  at  Law,  Indianapolis,  Ind.  1052-1092 


Of    THE 

UNIVERSITY 

OF 


A  Review  of  Life  Insurance 


FROM    THE    DATE    OF   THE 


FIRST  NATIONAL  CONVENTION  OF 
INSURANCE  OFFICIALS. 

18/1-1880. 


JOHN  A.  McCALL. 

PRELIMINARY. 

AT  the  time  of  the  meeting  of  the  First  Conven- 
^  tion  of  Insurance  Officials,  in  May,  1871, 
American  Life  Insurance  had  passed  through  two 
distinctive  periods,  and  had  nearly  reached  the 
end  of  the  third.  In  the  first  period  life  insurance 
was  done  almost  entirely  by  proprietary  com- 
panies, organized  primarily  for  the  transaction  of 
fire  insurance,  banking  and  trust  business.  Fol- 
lowing this  came  the  period  of  the  early  mutuals 
and  other  profit-sharing  comj)anies,  doing  a  life 
insurance  business  exclusively.  The  marked  suc- 
cess of  these  organizations,  between  1843  and  1862, 
caused  a  great  multiplication  of  life  companies. 


10 

Life  Insurance  shared  the  fate  of  other  industries 
of  the  time — flourished  and  grew  with  them — as 
later  it  suffered  with  them.  From  1862  to  1870  the 
number  of  companies  reporting  to  the  New  York 
Department  increased  from  eighteen  to  seventy- 
one— the  latter  being  the  highest  number  ever 
reported.  During  the  same  period  the  insurance 
in  force  and  the  gross  assets  increased  over  ten- 
fold. In  eight  years  over  two 'hundred  and  thirty 
million  dollars  were  added  to  assets,  and  over 
eighteen  hundred  millions  to  risks  in  force. 

During  this  period  State  supervision  in  New 
York  became  full-fledged.  It  was  begun  in  a  mild 
form  under  the  Revised  Statutes  of  1828,  which 
required  all  moneyed  corporations  thereafter  cre- 
ated to  make  annual  reports  to  the  State  Comp- 
troller. This  provision  was  continued  in  the  first 
general  Insurance  Act  of  April  10,  1849,  and  com- 
pliance with  its  requirements  by  foreign  companies 
was  made  a  condition  of  their  admission  to  the 
State.  A  deposit  with  the  State  for  the  protection 
of  policy-holders  was  first  required  by  the  Act  of 
April  8,  1851,  and  under  this  Act  the  Comptroller 
was  given  authority  to  make  official  examinations 
of  companies.  This  Act  also  made  the  possession 
of  a  re -insurance  fund  a  necessity,  and  required  a 
company  to  be  dissolved  if  its  assets  were  not  suf- 
ficient to  re-insure  its  outstanding  risks.     The  gen- 


11 

eral  Life  and  Healtli  Insurance  Law  of  1853  re- 
quired the  companies  to  report  a  classified  state- 
ment of  all  policies  in  force,  together  with  the 
data  necessary  for  an  official  valuation  of  policy 
liabilities.  The  Act  of  April  15, 1859,  creating  the 
Insurance  Department,  made  no  new  requirement 
of  the  companies,  but  transferred  to  the  Superin- 
tendent the  authority  over  them  formerly  exercised 
by  the  Comptroller.  A  standard  of  solvency  was 
first  adopted  by  law  in  1866,  the  English  Life  Table 
No.  3  for  Males,  with  interest  at  five  per  cent. ,  being 
chosen.  In  1868  the  standard  was  changed  to  the 
American  Experience  Table,  with  interest  at  four 
and  one- half  per  cent.  The  first  official  valuation 
of  the  policy  liabilities  of  all  companies  doing  busi- 
ness in  the  State  was  made  as  of  December  31, 1869. 
The  second  annual  valuation,  made  December  31, 
1870,  showed  seventy-one  solvent  companies  with 
$2,000,000,000  of  insurance,  8269,000,000  in  assets 
and  $48,000,000  in  surplus.  At  this  time  six  other 
States  had  adopted  the  ]S"ew  York  standard,  while 
four  States  stood  with  Massachusetts  for  the  Actu- 
aries' Table,  with  four  per  cent,  interest  ;  Iowa  had 
anticipated  the  financial  discussions  of  our  day  by 
adopting  a  double  standard.  Such  was  the  condi- 
tion of  the  companies  and  such  the  standards  of 
solvency  at  the  assembling  of  the  First  Convention 
of  Insurance  OflScials  in  May,  1871. 


12 


THE  CONVENTION. 


What  were  the  burning  questions  of  the  time 
may,  perhaps,  be  best  judged  by  noting  those  which 
most  occupied  the  attention  of  the  Convention. 
These  were  (1)  a  uniform  blank  for  the  use  of  com- 
panies in  making  their  annual  reports,  and  the  ac- 
ceptance by  each  Department,  within  the  limits  of 
existing  law,  of  the  certificates  of  other  Depart- 
ments, as  to  valuations  and  assets  of  home  com- 
panies ;  (2)  uniform  methods  of  valuation,  includ- 
ing table  of  mortality  and  rate  of  interest  ;  (3) 
uniform  insurance  laws,  including  uniform  taxa- 
tion of  life  companies  ;  (4)  the  best  method  of  deal- 
ing with  insolvent  companies. 

The  first  of  these  subjects  being  within  the  pur- 
view of  the  Convention,  a  uniform  blank  was 
adopted  and  recommended  to  the  various  Depart- 
ments. This  form  was  so  modified  in  1875  that  re- 
ports should  present  a  perfect  balance-sheet,  and, 
with  slight  amendments,  it  has  been  continued  un- 
til the  present  time.  Upon  other  subjects  named 
the  Convention  could  only  make  recommendations. 
The  report  of  the  Committee  on  mortality  table  and 
interest  rate  was  presented  at  the  October  session 
and  fills  over  90  printed  pages,  while  the  papers, 
addresses  and  letters  on  the  subject  occupy  150 
pages  more.    All  this  was  in  addition  to, the  ex- 


13 

tended  discussions  had  during  the  sittings  of  the 
Convention.  The  American  Table  of  Mortality, 
with  four  and  one-half  per  cent,  interest,  was 
finally  recommended  by  a  vote  of  23  to  3.*  Judg- 
ing from  the  attention  it  received,  this  was  consid- 
ered the  most  important  question  before  the  Con- 
vention. The  companies,  as  a  whole,  expressed  no 
preference  for  any  particular  table  of  mortality  or 
rate  of  interest ;  but,  in  response  to  a  request  of 
the  Convention  to  lay  before  it  such  matters  as 
they  deemed  of  importance  to  be  considered,  they 
urged  uniformity  in  the  forms  of  annual  reports, 
the  adoption  of  the  same  basis  and  system  in  valu- 
ations, the  interchange  of  certificates  of  valuation 
and  assets,  the  deposit  of  securities  in  one  State 
only,  the  appointment  of  one  agent  or  attorney 
only  in  each  State  for  service  of  process,  and  uni- 
formity in  taxation. 

A  draft  of  a  reciprocal  insurance  law  was  re- 
ported, discussed  and  finally  recommended  to  the 
several  States  for  adoption.  A  resolution  to  the 
effect  that  it  was  impolitic  to  tax  life  insurance 
premiums  was  lost  by  a  vote  of  13  to  8,  and  a  reso- 
lution to   the  effect  that  the   tax    on   premiums 


*Mr.  William  E.  Harvey,  of  Illinois,  announced  that  he  was 
under  instructions  to  vote  for  the  Actuaries'  Table  unless  a  unani- 
mous vote  could  be  obtained  for  some  other  standard.  Report  sec- 
ond session,  pp.  216,  220. 


14 

should  not  exceed  one  and  one-half  per  cent,  was 
adopted  by  a  vote  of  13  to  10.*  The  Secretary 
of  the  Convention  compiled  a  table  showing  the 
taxes  imposed  on  Life  Insurance  by  the  various 
States  and  Territories  in  1870,  and,  in  order  to  ascer- 
tain whether  the  former  times  were  better  or  worse 
in  this  respect  than  the  present,  I  have  had  made 
up  a  table  showing  what  taxes  the  New- York  Life 
Insurance  Company  paid  in  1897  in  each  State  and 
Territory  of  the  United  States,  and  what  it  would 
have  paid  in  each  had  the  laws  been  the  same 
as  they  were  in  1870. 

The  table  shows  an  increase  in  taxation  by  States 
having  tax  laws  in  1871,  of  about  three-fourths  of 
one  per  cent,  for  the  same  amount  of  business.  In 
twenty- two  States  taxes  are  higher  than  in  1871, 
and  in  seven teeji  States  they  are  lower.  The  most 
striking  feature  of  the  table  is  its  inequalities. 
In  twenty-five  States  and  Territories,  where  the 
Company  had  $317,000,000  insurance  in  force  in 
1897,  it  paid  $23,000  in  taxes  ;  in  twenty-four  other 
States  and  Territories,  where  it  had  $313,000,000  in- 
surance in  force,  it  paid  $207,000  in  taxes.  The  tax- 
ation of  Life  Insurance  cannot  be  said  to  be  founded 
on  any  recognized  principles  of  equity  or  of  po- 
litical economy  when  in  one-half  of  the  Union  it  is 
taxed  nine  times  as  heavily  as  it  is  in  the  other  half. 
*  Report  second  aeasion,  pp.  188-4. 


Comparative  Results  of  Tax  Laws  in  1871  and  1897  on  the 
Business  of  the  New- York  Life  Insurance  Company. 


State 
OR  Territory. 


Alabama 

Arizona 

Arkansas 

California   

Colorado 

Connecticut 

Delaware 

Dist.  of  Columbia 

Florida    , 

Georgia 

Idaho  

Illinois 

Indiana , 

Iowa , 

Kansas 

Kentucky 

Louisiana 

Maine   

Maryland 

Massachusetts 

Michigan 

Minnesota 

Mississippi , 

Missouri 

Montana 

Nebraska , 

Nevada , 

New  Hampshire . . 

New  Jersey 

New  Mexico 

New  York 

North  Carolina.. 

North  Dakota 

Ohio 

Oklahoma 

Oregon   

Pennsylvania 

Rhode  Island 

South  Carolina  . . 

South  Dakota 

Tennessee 

Texas 

Utah    , 

Vermont 

Virginia 

Washington 

West  Virginia 

Wisconsin 

Wyoming 


Toul  amount 

paid  in  1897, 

under  laws  then 

in  force. 


$2,840.58 

991.23 

1,306.29 

729.^5 

5,231.89 

306.00 

402.48 

1,176.69 

4,023.56 

7,370.61 

97.00 

1,402.74 

10,588.58 

12,806.58 

256.67 

14,210.20 

3»7i5-io 

289.44 

5,766.05 

16,593-84 

8,539.15 

5»5oi.96 

1,552.00 

17,882.46 

2,154-75 

133-19 

100.00 

607.68 

335-00 

226.00 


3,682.58 
1,310.06 

23,920.81 
142.06 
883.30 

31,746.29 
2,752.06 
5,092.04 
1,873-62 
6,132.44 

10,628.62 

1,565-63 
3,810.52 

3.839-37 

1,813.31 

2,057.41 

451.00 

934.40 


$229,773.09 


Amount  which 

would  have  been 

paid  in  1897  on 

basis  of  laws 

current  in  1871. 


$4,776.96 


2,402.69 
6,454.66 
5,088.64 
5,920.06 

745-64 
1,155-94 

490.00 
6,281.61 

2,900.00 

262.50 

711.00 

4,598.52 

16,289.33 

7,130.96 

103.00 

3,913-85 

8,300.72 

12,795.27 

2,082.50 
500.00 

III. 19 
1,137-68 

487.68 
7,867.70 

8,675.00 
1,800.29 

19,519.84 


145.00 

47,429.43 

2,861.06 

205.00 


4,438.86 
500.00 

2.00 
7,679.76 

17838.7; 
408.00 
364-95 


Insurance  in 

force 
Dec.  31,  1897. 


$6,951,000 

2,097,000 

3,183,000 

20,015,000 

7,727,000 

8,471,000 

778,000 

3,545,000 

5,800,000 

14,609,000 

3,002,000 

51,798,000 

14,538,000 

18,188,000 

7,099,000 

18,770,000 

16,508,000 

3,957,000 

7,463,000 

26,563,000 

12,392,000 

10,238,000 

8,292,000 

29,215,000 

4,862,000 

7,272.000 

1,108,000 

1,888,000 

15,754,000 

3,064,000 

123,413,000 

5,489,000 

1,529,000 

28,367,000 

1,136,000 

3,601,000 

45,506,000 

4,171,000 

6,537,000 

2,833,000 

7,815,000 

25,828,000 

3,456,000 

4,800,000 

9,075,000 

4,545,000 

3,234,000 

12,204,000 

1,425,000 


$198,376.00        $630,111,000 


16 

The  Committee  on  Winding  Up  Insolvent  Com- 
panies reported  a  plan,  which  was  laid  upon  the 
-ftible  until  the  next  year.  Speaking  of  this'  action 
Mr.  Harvey,  of  Missouri,  who  was  a  member  of  the 
Committee,  said  in  a  paper  read  before  the  Con- 
vention of  1890 : 

'*  There  was  a  unanimous  conviction  that  the 
prospect  at  that  time,  under  the  existing  inflation 
of  values,  had  a  dangerous  aspect,  but  where  or 
how  soon  the  wrecks  were  to  begin  no  one  dared 
predict ;  and  yet  no  member,  nor  the  committee  to 
which  was  given  the  matter  of  devising  the  skeleton 
of  a  uniform  insurance  law  for  all  the  States,  seemed 
to  think  it  worth  while  to  suggest  immediate  legis- 
lation, under  which,  if  the  storm  did  burst,  some 
of  the  craft  might  be  saved.  In  the  law  which  was 
proposed  at  the  fall  session,  a  section  looking  to 
the  possible  recovery  of  an  impaired  company  was 
incorporated ;  but  subsequent  events  have  shown 
that  its  application  would  have  been  a  remedy  to 
kill,  not  cure.''* 

The  method  incorporated  in  the  proposed  law 
differed  but  little  from  the  method  pursued  with 
such  disastrous  results  under  the  laws  of  New 
York  in  the  years  immediately  following.  The 
method  proposed  by  the  Committee  had  the  merit 
of  keeping  an  insolvent  company  together,  apply- 

♦  Official  report,  pp  18.  19. 


17 

ing  the  assets  on  hand  to  the  purchase  of  paid-up 
insurance,  and  devoting  all  future  premiums  re- 
ceived to  the  purchase  of  new  insurance  at  a  rate 
adjusted  to  attained  age.  There  was  really  no 
question  before  the  Convention  of  such  pressing 
importance  as  this,  and  the  long  debates  over 
tables  of  mortality  and  rates  of  interest  might  well 
have  been  spared,  if  a  just  and  workable  measure 
for  saving  insolvent  companies  from  the  waste  of 
receiverships  could  have  been  devised  and  urged 
upon  the  attention  of  legislators.  The  ''unani- 
mous conviction  "  of  danger  spoken  of  by  Mr. 
Harvey,  was  well  founded.  The  official  valuations 
of  December  31st,  preceding,  showed  an  impair- 
ment of  the  capital  stock  of  twenty -nine  companies 
by  the  IS'ew  York  standard,  and  of  thirty-six  com- 
panies by  the  Massachusetts  rule.  Superintendent 
Miller,  of  New  York,  who  called  the  Convention 
and  presided  over  its  deliberations,  had  made  nu- 
merous examinations  of  life  companies  in  1870,  and 
as  a  result,  two  New  York  companies  and  two 
British  companies  had  been  obliged  to  cease  doing 
business.  The  fate  that  befell  policy-holders  in 
these  four  organizations  was  typical  of  that  which 
was  in  store  for  those  of  thirty-two  of  the  thirty- 
six  companies  already  referred  to,  as  showing  an 
impairment  of  capital  under  the  Massachusetts 
standard — one  was  wound  up  by  a  receiver  who 


18 

paid  about  25  cents  on  the  dollar,  while  the  other 
three  were  reinsured  in  companies  that  either 
failed,  or  were,  in  turn,  re-insured  in  other  com- 
panies that  failed. 

Before  considering  the  events  of  the  period  im- 
mediately following  1871,  it  may  be  well  to  glance 
at  some  features  of  the  policy  contract  at  this  time. 
All  policies  contained  numerous  restrictions  upon 
residence,  travel,  occupation,  habits  of  life  and 
manner  of  death,  under  which  a  policy  might  be 
cancelled  or  become  void.  There  was  no  incontest- 
able clause.  Ordinary  Life  policies  issued  prior  to 
about  1868,  and  all  policies  issued  prior  to  1860, 
contained  no  non-forfeiture  conditions.  Dividends 
in  most  companies  were  declared  annually,  and 
were  generally  available  in  the  reduction  of  annual 
premiums,  or  were  added  to  the  policies  in  the  form 
of  paid-up  insurance.  In  1868  the  Equitable  had 
begun  the  issue  of  a  deferred  dividend  polic3^ — 
which  was  forfeitable  for  non-payment  of  premium 
during  its  first  dividend  period,  such  period  being 
fixed  by  the  time  required  for  the  annual  prem- 
iums, compounded  at  ten  per  cent,  per  annum,  to 
amount  to  the  face  of  the;  policy.  In  1870  the 
Mutual  began  the  issue  of  policies  which  were  for- 
feitable for  non-payment  of  premium  during  the 
first  dividend  period  of  10,  W  or  20  years.  In  1871 
the  New- York  Life  began  the  issue  of  a  10- year 


19 

dividend  policy  which  was  forfeitable  for  non-pay- 
ment of  premium  during  the  first  dividend  period. 
These  policies  did  not,  however,  contain  the  options 
in  settlement — including  cash  surrender  value- 
afterward  incorporated  in  deferred  dividend  poli- 
cies by  these  and  other  companies. 

A   PEEIOD    OF   DISASTER. 

The  nine  years  immediately  following  the  First 
Convention  must  be  accounted  the  most  trying 
period  in  the  history  of  American  Life  Insurance. 
The  number  of  companies  which  ceased  doing  busi- 
ness in  New  York  was  forty-six.  Only  four  re- 
insured in  companies  that  remained  solvent ;  only 
ten  others  paid  their  liabilities  in  full.  Receivers' 
reports  are  incomplete,  but  a  careful  examination 
of  such  as  are  accessible  show  the  total  loss  to 
policy-holders  by  failures  among  American  life 
companies  to  be  about  thirty -five  million  dollars, 
nearly  all  of  which  occurred  during  this  period. 


20 


Losses  in  New  York  Companies. 


Name  of  Company. 

Cash 
Liabiliries. 

Cash 
Dividends. 

Loss  to 
Policy-holders. 

I.  Continental 

$4,821,048 
3,268,821 
1,727,282 
3,065,708 
2,923,829 
2,474,968 
2,812,599 
3,835,642 

$1,344,066 

1,921,002 

376.089 

685.344 
987,912 
259,764 
200,000 
1,815,804 

$3,476,982 
1.347,819 

1,351,^93 
2,380,364 

1,935,917 
2,215,204 
2,612,599 
2,019,838 

2.  Globe 

3.  Guardian 

4.  Knickerbocker 

5.  North  America ......... 

6.  Security  Life  and  Annuity 

7.  Universal 

Twelve  small  companies. 
Totals 

$24,929,897 

$7,589,981 

$17,339,916 

Includes  American  Tontine,  Farmers  and  Mechanics  and  Empire  Mutual. 

Includes  Merchants'  Life.    Dividends  include  $100,000  of  net  shortage  of  $129,550 

in  Expenditures  from  incomplete  receivers'  reports. 

Includes   Amicable,   Widows   and    Orphans    Benefit   and    Mutual   Protection 

(changed  to  Reserve  Mutual),  and  New  York  State  Life. 

Cash  Dividends  include  $75,000  of  $109,873  on  hand  December  31,  1886,  and 

not  reported  on. 

Includes  Standard  and  Government  Security. 

Liabilities  include  $1,500,000  for  loss  in  scaling  policies  in  1878.     Receivers'  re- 

£)rts   incomplete;   difTerence  between   receipts  and  disbursements,   $223,763; 
vidends  estimated. 

Losses  in  Other-State  Companies. 


Name  op  Company. 

Cash 
Liabilities. 

Cash 
Dividends. 

Loss  to 
Policy-holders. 

1.  New  Jersey  Mutual,  N.  J. 

2.  Piedm't  &  Arlington,  Va. 

3.  Republic,  111 

$1,006,185 
822,060 
1,100,500 
8,491,387 
1,752,050 
2,824,169 
1,935,846 
668,758 

1,302,533 

i,i9o,or2 

$41,024 

52,384 
346,112 
553,472 
297,848 
249,250 
417,279 

66,876 

454,195 
533,008 

$965,161 
769,676 
754,388 

7,937,915 
1,454,202 

2,574,919 

1.518,567 

601,882 

848,338 

657,004 

4.  Charter  Oak,  Conn 

5.  Continental,  Conn 

6.  Columbia,  Mo.......... 

7.  Life  Association,  Mo 

8.  Am.  Nat'l  L.  &  T.,  Conn. 

9.  American,  Pa  ...... .... 

Seven  small  companies. . 
Totals 

$21,093,500 

$3,011,448 

$18,082,053 

3.  Includes  Hahnemann,  Ohio,  and  Economical  R.  I. 

4.  Liabilities  include  a  loss  of  $5,^46,749  in  scaling  policies  in  1877. 

6.  Includes  St.  Louis  Mutual,  Atlas  and  De  Soto. 

7.  Include*  Empire  Sute  Mutual,  N.  Y. 


21 

The  statutes  applicable  to  winding  up  insolvent 
companies  were  entirely  inadequate,  and  mucli  ex- 
pensive litigation  was  necessary  to  determine  what 
the  law  really  was.  Meanwhile  the  waste  and  ex- 
travagance of  receiverships  went  on  until  they  be- 
came almost  as  great  a  scandal  as  the  mismanage- 
ment of  companies  that  had  brought  them  into 
being.  The  situation  was  more  acute  in  New 
York  State  than  elsewhere  because,  of  the  forty-six 
companies  which  ceased  doing  new  business,  twen- 
ty-seven had  their  domicile  in  that  State.  Governor 
Robinson  called  attention  to  the  subject  in  his  an- 
nual message  of  1878,  and  the  delegates  to  this  Con- 
vention at  its  meetings  in  1877  and  1878  adopted 
resolutions  deploring  the  evils  of  receiverships,  and 
pledging  themselves  to  make  every  effort  to  save 
companies  from  receivers'  hands.  The  Legislature 
did  but  little  to  protect  the  interests  of  policy- 
holders, and  the  ill-timed  denunciation  of  Life  In- 
surance indulged  in  by  some  of  its  members  often 
failed  to  discriminate  between  well,  and  ill-man- 
aged companies,  and  so  added  to  public  distrust. 
The  insurance  legislation  of  this  period  in  New 
York,  which  was  intended  to  be  remedial,  was  :  A 
law  (in  1873)  limiting  the  Superintendent's  charges 
for  examining  companies  to  actual  expenses,  and 
providing  a  specific  method  of  payment ;  a  law  (in 
1876)  requiring  the  companies  to  give  thirty  days' 


22 

notice  of  premiums  falling  due  before  declaring 
policies  lapsed  ;  a  law  (in  1877)  forbidding  life  com- 
panies to  re-insure  risks  without  the  written  con- 
sent of  the  insured,  and  authorizing  receivers  to  re- 
insure the  whole  or  any  part  of  the  risks  of  insol- 
vent companies  ;  a  law  (in  1879)  regulating  and  ex- 
pediting the  winding  up  of  insolvent  companies ; 
and  a  non-forfeiture  law  (in  the  same  year)  which 
was  somewhat  less  liberal  in  its  provisions  than 
the  terms  which  were  freely  granted  under  the 
policies  of  most  companies.  The  value  of  these 
measures  of  relief  will  be  apparent  when  I  say  that 
a  failure  involving  a  very  heavy  loss  to  policy- 
holders occurred  in  1883,  several  years  after  the 
last  law  mentioned  was  enacted. 

Other  important  legislation  of  the  period  was 
the  reciprocal  valuation  law  (1873) ;  the  law  (1873) 
allowing  a  life  company  to  purchase  its  own  poli- 
cies issued  in  favor  of  a  wife  with  reversion  to 
children  ;  the  law  (1879)  allowing  such  policies  to 
be  assigned  ;  and  the  Massachusetts  law  (1880)  re- 
quiring the  companies  to  pay  a  cash  surrender 
value  if  requested  at  the  end  of  any  year  after  the 
firet. 

The  loss,  to  solvent  companies,  of  business  as 
well  as  of  prestige,  during  this  period,  was  very 
great.  In  1870  the  income  of  the  companies  doing 
business  in  New  York  was  $106,000,000,  in  1879  it 


23 

was  $76,000,000;  in  1870  the  new  business  was 
$588,000,000,  in  1879  it  was  $168,000,000 ;  in  1870 
the  risks  in  force  were  $2,024,000,000,  in  1879  they 
were  $1, 440, 000, 000.  Notwithstanding-  the  removal 
of  so  many  competitors  from  the  lield,  the  business 
of  the  thirty-one  solvent  companies  was  less  in 
1879  than  that  of  the  same  companies  in  1870 ; 
their  income  was  two  millions  less,  their  risks  in 
force  were  seventy  millions  less,  and  their  new 
business  had  fallen  off  over  one -half.  The  total 
new  paid-for  business  of  all  the  companies  in  1879 
was  nearly  thirty-eight  million  dollars  less  than 
has  since  been  written  in  one  year  by  a  single 
company. 

Yet  all  tliese  losses  and  failures  are  but  a  part 
— and  a  small  part  at  that — of  the  loss  and  fail- 
ure which  overtook  the  business  interests  of  the 
country  generally  during  the  same  period.  The 
financial  panic  of  1873  marked  the  culmination  of 
the  over-trading,  over- building  and  over-capitali- 
zation which  resulted  naturally  from  the  inflation 
of  the  currency  during  the  Civil  War.  Life  insur- 
ance had  grown  more  rapidly  than  any  other  busi- 
ness of  equal  magnitude ;  its  failures  and  losses 
were  proportionately  much  less.  At  the  end  of 
1873  the  entire  capital  account  of  the  railroads  of  the 
country  was  about  thirty-eight  hundred  million 
dollars,  and  during  the  next  six  years  roads  repre 


24 

senting  nearly  one  thousand  millions  were  sold 
under  foreclosure  or  went  into  receivers'  hands. 
The  assets  held  by  failing  life  companies  amounted 
to  about  one-ninth  of  the  total ;  the  assets  of  de- 
faulting railroad  companies  represented  over  one- 
quarter  of  the  total.  About  one-fourth  of  all  the 
savings  banks  in  New  York  went  out  of  existence 
during  the  six.  years  following  1871,  with  losses 
amounting  to  about  four  and  one-half  million  dol- 
lars. The  Superintendent  of  the  Banking  Depart- 
ment, commenting  on  these  failures,  said,  if  the 
funds  of  all  savings  banks  in  the  State  had  been 
invested  in  United  States  bonds  in  1871,  the  shrink- 
age would  have  been  seven  million  dollars ;  if  in 
the  best  railroad  securities,  it  would  have  been 
over  thirty  millions ;  if  in  the  best  bank  stocks, 
thirty-five  millions ;  and  if  in  real  estate,  from 
forty  to  fifty  millions. 

It  has  been  the  custom  of  writers  who  would  ex- 
alt Life  Insurance  to  give  scant  space  to  the  dis- 
cussion of  the  failures  and  losses  of  this  period  ; 
but  to  my  mind  there  is  no  period  in  Life  Insurance 
history  that  deserves  more  careful  study,  and  none 
that  contains  more  valuable  lessons  to  the  life  in- 
surance manager.  Why  did  these  companies  fail  ? 
A  true  and  complete  answer  to  that  question  would 
put  every  officer  and  every  trustee  of  a  life  com- 
pany on  his  guard  against  like  causes  and  a  like 


25 

catastrophe.  As  we  have  already  seen,  these  fail- 
ures were  contemporaneous  with  many  other 
failures  in  the  business  world,  and  something  must 
unquestionably  be  allowed  for  the  great  shrinkage 
in  values,  as  measured  by  the  currency  of  the 
country,  between  1864  and  1879.  But  the  com- 
panies that  survived  and  increased  in  strength  were 
obliged  to  meet  the  same  conditions, — how  did  they 
escape  ?  A  study  of  the  reports  of  this  period 
shows  but  very  little  charged  off  to  profit  and  loss 
by  the  failing  companies  ;  but  a  study  of  their  con- 
dition at  the  time  of  failure  shows  a  great  gulf 
between  actual  and  assumed  values  of  assets.  In 
many  of  these  companies  gross  frauds  had  been 
practiced  for  years,  and  a  thorough  examination 
would  have  exposed  them.  In  others,  loans  had 
been  made  on  insufiicient  security  and  with  evident 
profit  to  favored  individuals.  In  some  cases  loans 
upon  which  neither  interest  nor  tax^s  had  been 
paid  for  years  were  carried  on  the  books  at  their 
full  face  value.  Such  assets,  under  the  inexorable 
rules  of  a  receivership,  melted  away  like  snow  be- 
neath a  summer  sun.  Six  of  the  largest  failing 
companies  having  their  domiciles  in  New  York 
State  made  the  following  showing:  Real  estate 
owned  and  bonds  and  mortgages  on  real  estate,  at 
the  companies'  last  reports,  $14,160,057 ;  amount 
realized   from   same  by  receivers,  $4,449,984, — or 


26 

about  thirty-one  and  one-half  per  cent.  All  other 
assets,  by  companies'  last  reports,  $4,538,196 ; 
amount  realized  by  receivers,  $2,232,424, — a  little 
over  forty ruine  per  cent.  During  the  continuance 
of  these  receiverships  there  was  received,  in  addi- 
tion to  the  foregoing,  as  interest  and  rents  on  all 
property,  $676,030,  and  $908,302  was  paid  out  as 
real  estate  expenses.  Other  expenses  of  these  re- 
ceiverships were  $1,678,172,  or  a  little  over  twenty- 
two  per  cent,  of  total  receipts. 

But  what  brought  these  companies  so  near  the 
"ragged  edge"  of  insolvency,  according  to  their 
own  statements  and  valuations,  that  their  true  con- 
dition could  no  longer  be  concealed  ?  For  an  an- 
swer to  this  question  I  have  tabulated  the  most 
important  items  of  income  and  expenditure  of  the 
largest  of  these  companies,  as  they  appear  in  the 
New  York  reports,  from  1864  until  the  companies 
ceased  doing  business  in  the  State.  The  examina- 
tion covers  seven  New  York  companies  with  an 
average  of  over  twelve  years  of  business,  and  seven 
other- state  companies  with  an  average  of  over  six 
years  of  business.  These  fourteen  companies  ab- 
sorbed by  re-insurance  previous  to  their  demise 
fourteen  other  companies,  and  together  they  repre- 
sent the  bulk  of  the  failures,  as  regards  amount  of 
business  and  losses  incurred,  that  have  taken  place 
among  American  life  insurance  companies.     As  a 


27 

standard  of  comparison  I  have  taken  the  record  for 
ten  years,  1865  to  1874,  both  inclusive,  of  the  twenty- 
six  companies  which  were  in  existence  during  the 
period,  1864-1879,  and  which  are  still  solvent  and 
active.  The  following  is  a  summary  of  the  results : 
(1)  The  Interest  Rate  of  the  failing  companies  was 
nearly  one  per  cent.  (.86)  less  than  that  of  the  sol- 
vent companies ;  (2)  Expenses  of  Management  in 
the  failing  companies  were  nearly  seven  per  cent, 
more  of  premium  receipts,  or  about  four  and  one- 
half  dollars  more  per  thousand  of  insurance  in 
force,  than  in  the  solvent  companies ;  (3)  Death- 
Claims  Paid  were  nearly  three  per  cent,  more  of 
premium  receipts,  or  nearly  three  dollars  per  thou- 
sand of  insurance,  higher  in  the  failing  companies 
than  in  the  solvent  companies.  The  higher  rate  of 
interest  earned  by  the  solvent  companies  would 
have  given  the  failing  companies  nearly  four  mil- 
lion dollars  more  in  interest  receipts;  the  lower 
rate  of  expenses  of  management  of  the  solvent  com- 
panies would  have  saved  the  failing  companies  be- 
tween twelve  and  sixteen  million  dollars  ;  *  and  the 
lower  death-claim  ratio  of  the  solvent  companies 
would  have  saved  the  failing  companies  between 
four  and  ten  million  dollars.* 
During  the  period  covered  by  this  review  the  f  ail- 

*According  as  it  is  calculated  on  premiums  or  insurance. 


28 

ing  companies  paid  nearly  nineteen  million  dollars 
in  dividends  to  policy-holders,  but  the  ratios,  both 
to  premiums  and  to  insurance  carried  one  year, 
were  but  little  more  than  one-half  as  large  as  in  the 
solvent  companies.  The  results  attained  by  con- 
sidering the  question  from  opposite  sides  corrobor- 
ate each  other  ;  for  example,  the  additional  amount 
needed  by  the  failing  companies  to  pay  as  large 
dividends  as  were  paid  by  the  solvent  companies 
would  have  been  (according  as  the  ratio  to  insur- 
ance or  to  premiums  is  used)  from  fifteen  to  twenty 
million  dollars ;  while  the  saving  to  the  failing 
companies  by  ratios  of  interest,  expenses  and  death- 
claims  as  favorable  as  those  of  the  solvent  com- 
panies, would  have  been  from  twenty  to  twenty- 
nine  million  dollars.  With  the  same  rates  of  in- 
terest, expenses  and  death-claims  as  the  solvent 
companies,  the  failing  companies  might  have  paid 
the  same  rate  of  dividends  and  added  from  five  to 
nine  millions  to  surplus  ;  the  solvent  companies, 
with  almost  exactly  three  times  as  much  business, 
in  the  period  under  review,  actually  added  over  six- 
teen millions  to  surplus. 


29 


Items  Compared. 

Fourteen 
Failing  Companies. 

Twenty-six 
Solvent  Companies. 

Premiums  Received 

$181,311,456 

23.115.330 
42,047,901 

$542,433,216 

1071527, 706 

89.365.506 

Interest  Received 

Expenses  and  Taxes 

Death-Claims  Paid 

45,684,998 
18,877,145 

122,526,057 
116,003,445 

Dividends  Paid   

Assets  at  Interest  One  Year  . 

436,145.764 

1,747,045.422 

Insurance  Carried  One  Year. 

3.469,945.312 

11,706,789,279 

Average  Interest  Rate 

5.30  per  cent. 

6. 16  per  cent. 

Expenses  to  Premiums 

23. 19  per  cent. 

16.47  per  cent. 

Expenses  per  $i,ooo  Ins 

$12.12 

$7.63 

Death-Claims  to  Premiums  .. 

25.20  per  cent. 

22.59  per  cent. 

Death-Claims  per  $i,oooIns. 

$13-17 

$10.47 

Dividends  to  Premiums 

10.41  per  cent. 

21.38  per  cent. 

Dividends  per  $i,oooIns 

$5-44 

$9.91 

Expenses  and  Death-Claims  to 

Premiums   

48.39  per  cent. 

39.06  per  cent. 

Expenses   and  Death-Claims 

per  $i,ooo  Insurance 

$25.29 

$18.10 

It  seems  clear  from  this  review  that  these  failures 
resulted  from  bad  management,  in  the  broadest 
sense  of  the  term.  It  was  extravagant,  wasteful, 
dishonest.  It  paid  too  much  for  services  rendered  ; 
it  did  not  take  proper  care  of  the  results  obtained. 
The  data  upon  which  it  proceeded  were  not  decep- 
tive ;  no  company  failed  because  of  an  excessive 
death-rate,  nor  (save  in  a  single  case)  because  it 
was  impossible  to  realize  a  rate  of  interest  equal  to 
that  upon  which  its  premiums  were  cast.*  The  as- 
sumption which  failed  was  that  the  loading  on  the 
net  premiums  would  equal  expenses  and  losses  on 
investments.     Some  of  the  smaller  companies  were 


*The  Universal,  which  assumed  six  per  cent,  interest  in  calcu- 
.ating  its  premiums. 


30 

■ 

indeed  honestly-managed,  and  re-insured  wMle  sol- 
vent ;  their  mistake  was  in  re-insuring  in  badly 
managed  companies.  There  were  others  which 
might  have  been  saved  by  more  judicious  handling 
on  the  part  of  officers  of  the  law ;  their  mistake 
was  in  approaching  so  near  the  "dead-line"  that 
officers  of  the  law  could  drag  them  over  it.  In  no 
other  business  is  failure  so  disastrous  as  in  Life 
Insurance  ;  in  no  other  is  it  so  unnecessary  ;  in  no 
other  is  it,  therefore,  so  inexcusable.  It  is  of  no 
use  to  lay  the  blame  of  failure  uj)on  the  law  that 
makes  a  net  valuation  the  test  of  solvency,  because 
this  law  existed  before  most  of  these  companies  be- 
gan business.  That  was  one  of  the  conditions  of 
their  life,  to  be  prepared  for  and  conformed  to,  as 
much  as  any  other  condition.  As  it  is  the  province 
of  history  to  teach  us  how  we  may  avoid  the  mis- 
takes of  our  predecessors,  I  venture  to  suggest  the 
following  as  some  of  the  safeguards  suggested  by 
this  study : 

1.  The  utmost  care  in  making  investments — se- 
curity to  be  always  the  paramount  consideration. 

2.  The  necessity  of  frequent  revaluations  of  se- 
curities, and  of  their  rigid  adjustment  to  changing 
conditions. 

3.  The  close  study  of  a  company's  business  upon 
the  principles  of  the  ''  Gain  and  Loss  Exhibit  " 
now  required  by  several  Insurance  Departments. 


81 

4.  The  assumption,  for  purposes  of  practical  ad- 
ministration, of  a  higher  standard  of  reserve  than 
that  by  which  the  company's  solvency  is  tested 
under  the  law. 

The  first  of  these  siiggestions  may  reduce  the 
rate  of  interest,  but  it  will  save  the  principal ;  the 
second  will  prevent  any  serious  reduction  of  assets 
by  insurance  officials  ;  the  third  will  locate  the 
fault  of  administration,  if  there  be  one ;  and  the 
fourth  will  preserve  a  strip  of  neutral  ground  be- 
tween the  path  the  company  has  marked  out  for 
itself  and  the  line  to  which  it  cannot  come  near 
with  safety. 

In  1879  the  epidemic  of  failures  which  had  set  in 
nine  years  before  had  run  its  course  ;  the  patients 
were  nearly  all  dead,  and  the  business  of  the  re- 
maining companies  began  to  improve.  In  1879  the 
new  insurance  showed  an  increase  from  its  lowest 
point ;  in  1880  insurance  in  force  showed  an  in- 
crease from  its  lowest  point ;  and  in  1881  the  total 
income  showed  an  increase  from  its  lowest  point. 
No  one  but  those  who  were  familiar  with  the  busi- 
ness in  those  troubled  years  can  realize  how  hard 
the  struggle  was,  nor  how  much  effort  was  required 
to  regain  lost  ground.  We  talk  lugubriously  some- 
times of  the  difficulties  of  getting  business  in  these 
latter  days,  because  of  the  fierce  competition — 
which  means,  practically,  that  the  difficulties  are 


32 

of  our  own  creating — ;  in  the  years  which  we  are 
reviewing,  the  whole  outside  world  seemed  in  arms 
against  the  life  insurance  manager.  Not  until  1886 
was  the  insurance  in  force  of  companies  doing  busi- 
ness in  New  York  as  great  as  in  1872 ;  not  until 
1887  was  the  total  income  as  large  as  in  1873 ;  and 
not  until  1888  was  the  new  insurance  as  much  as  in 
1869.  It  took  from  fourteen  to  nineteen  years  to 
repair  the  losses  which  life  insurance  suffered  by 
reason  of  commercial  depression  and  internal  mis- 
management. 

RISE  OF  ASSESSMENT   SOCIETIES. 

Another  result  of  these  same  causes  was  that 
multitudes  of  men  who  felt  the  need  of  life  in- 
surance protection,  sought  a  substitute  for  it  in 
co-operative  and  fraternal  societies.  I  am  aware 
that  there  is  well-founded  objection  to  calling  the 
operations  of  these  societies  insurance,  and  it  will 
be  stoutly  maintained  by  some  that  there  is  but  one 
system  of  real  life  insurance ;  nevertheless  there 
may  be  many  systems  of  post-mortem  relief,  and  it 
is  hardly  worth  while  to  quarrel  about  the  name  so 
long  as  we  apprehend  the  fact.  There  is  no  ques- 
tion but  that  many  co-operative  and  fraternal  so- 
cieties operating  between  1870  and  1880,  in  spite  of 
their  imperfect  system  and  because  of  honest  man- 
agement, furnished  better  protection  to  their  pa- 


83 

trons  than  tlie  level-premium  companies  whose 
demise  we  have  been  considering — although  the 
latter  were  organized  upon  plans  that  were  unas- 
sailable, ran  their  course  of  wickedness  under  the 
aegis  of  the  law,  and  died  in  the  odor  (a  very  bad 
odor,  to  be  sure)  of  regularity.  While  the  busi- 
ness of  the  level-premium  companies  that  failed 
was  but  a  small  percentage  of  the  whole,  and  there 
were  always  sound  and  well-managed  companies  in 
the  field,  yet  the  losses  were  nevertheless  great  and 
wide-spread,  and  it  was  little  comfort  to  one  who 
had  lost  the  accumulations  of  years  to  be  told  that 
he  should  have  insured  in  a  better  company.  A  sys- 
tem that  furnished  (or  even  promised)  present  pro- 
tection at  low  cost,  and  did  not  profess  to  accumu- 
late money  for  future  needs,  appealed  very  strongly 
to  men  who  did  not  understand  theories  of  insur- 
ance, but  who  were  angry  and  sore  at  heart  over 
losses  under  a  system  that  professed  to  be  perfect. 
There  are  no  of&cial  data  for  ascertaining  the 
number  of  co-operative  and  fraternal  societies 
organized  in  the  seventies  ;  but  there  are  now 
twenty  of  each  class  doing  business  in  New  York 
State,  which  were  organized  prior  to  1880.  The 
first  Handbook  of  Assessment  Insurance  was  pub- 
lished in  1886  *  and  contained  the  statistics  of  367 

*  By  the  Spectator  Company,  New  York. 


34 

societies,  119  of  which  were  organized  prior  to  1880. 
Reports  were  first  required  from  such  societies  by 
the  Pennsylvania  Department  in  1874,  and  by 
the  Massachusetts  and  New  York  Departments  in 
1882.  These  societies  have  undertaken  to  supply 
post-mortem  relief  by  levying  its  cost  upon  mem- 
bers in  a  variety  of  ways.  There  have  been  four 
plans  of  assessment  insurance,  all  of  which  are  still 
in  use,  -but  which  may  be  stated  in  the  order  of 
their  development  and  of  their  approach  to  the  level 
premium  plan,  as  follows  :  (1)  To  assess  all  mem- 
bers alike,  for  current  cost  only  ;  (2)  to  assess,  for 
current  cost  only,  according  to  a  table  graduated 
for  age  at  entrance;  (3)  to  assess  according  to  a 
table  graduated  for  age  at  entrance,  and  lay  aside 
an  arbitrary  sum  or  proportion  of  assessments  for  a 
reserve  fund  ;  (4)  to  charge  a  level  premium,  calcu- 
lated upon  assumptions  which  give  rates  approxim- 
ating those  of  level-premium  companies,  lay  aside  a 
reserve  fund  on  the  same  assumptions,  and  reserve 
the  right  to  assess  for  any  deficiency.  The  order 
in  which  these  plans  have  arisen,  as  well  as  their 
nature  and  the  actual  workings  of  each,  clearly 
demonstrate  that  if  an  organization  would  do  what 
the  level-premium  companies  guarantee  to  do,  it 
must  do  it  in  their  way,  and  that  methods  which 
require  less  from  members,  provide  less  for  mem- 
bers and  are  likely  to  miss  the  one  great  end  of 


35 

all  insurance— namely,  the  certainty  of  indemnity 
when  the  loss  occurs. 

The  operations  of  these  societies  have  been  at- 
tended with  a  large  degree  of  success— if  we  meas- 
ure success  by  the  number  of  persons  who  have 
joined  them  and  by  the  aggregate  amount  paid 
in  post-mortem  benefits.  If,  on  the  other  hand,  we 
regard  their  claim  to  supply  real  life  insurance  at  a 
much  lower  price  than  that  charged  by  the  level- 
premium  companies,  then  we  must  consider  them  to 
have  totally  failed  of  their  purpose.  Of  course, 
bad  management  has  been  a  fruitful  source  of  evil 
here,  as  well  as  in  level-premium  insurance.  The 
ease  with  which  such  societies  could  be  organized, 
and  their  comparative  freedom  from  official  over- 
sight until  within  a  few  years,  led  at  one  time 
to  a  speculative  craze  in  policies  upon  the  lives 
of  aged  and  invalid  persons  in  Pennsylvania,  and 
fraternal  endowment  societies  have  filched  from  the 
people  of  many  States  amounts  which  rival  the 
losses  of  the  failing  level -premium  companies.*  It 
must  be  observed  also  that  the  experience  of  these 
societies  has  not  justified  their  philippics  against 
the  expense  rate  of  the  level-premium  companies. 
The  expense-rate  of  the  level-premium  companies 
doing  business  in  New  York  State  in  1897  was  less 

*  Massachusetts  Insurance  Report,  1893,  pages  x-xvi . 


36 

than  twenty -three  per  cent,  of  income,  while  in  the 
co-operative  societies  it  was  over  twenty-eight  per 
cent,  of  income,  and  in  the  fraternals — if  we  allow 
four  dollars  per  year  for  lodge  dues— the  rate  was 
over  twenty  per  cent,  of  income. 

The  effect  of  the  operations  of  these  societies 
upon  the  business  of  level-premium  companies  must 
be  largely  a  matter  of  guess  work.  My  own  view 
is  that  it  has  been,  in  the  main,  beneficial.  They 
have  taught  people  the  cost  of  temporary  pro- 
tection and  the  value  of  permanent  insurance.  As 
these  societies  usually  provide  for  no  other  than 
post-mortem  benefits,  it  is  clearly  seen  that  to  fur- 
nish such  benefits  from  year  to  year  costs  a  con- 
siderable sum,  even  when  the  member  survives, 
hence  it  is  usually  easy  for  the  level-premium  com- 
pany to  show  that,  if  the  insured  is  willing  to  pay 
a  reasonable  price  for  such  indemnity  in  case  of 
death  during  a  selected  period,  the  company  will 
return  to  him,  if  he  survives  the  period,  all  his 
overpayments,  with  interest.  The  men  who  join 
these  societies  may  be  divided  into  two  classes — 
first,  men  who  would  not  or  could  not,  for  the  time 
being,  take  level -premium  insurance  ;  and  second, 
men  who  join  the  society  for  term  insurance  and 
for  social  purposes.  There  is  a  constant  influx  of 
members  from  the  societies  to  the  companies,  while 
the  number  of  those  going  in  the  opposite  direction 


37 

is,  I  apprehend,  very  small  indeed.  There  are  now 
seventy-eight  co-operatives  and  fifty-five  fraternals 
doing  business  in  the  State  of  New  York ;  these 
societies  are  the  largest  in  the  country,  and  do  the 
bulk  of  this  class  of  business,  yet  their  total  income 
is  surpassed  by  that  of  a  single  old-line  company.* 

II.— 1881-1897. 

The  period  from  1881  to  the  present  time  has 
been  one  of  uninterrupted  progress.  There  has 
been  but  one  failure  of  importance,  and  the  busi- 
ness has  steadily  grown  in  public  favor.  While  it 
required  fourteen  years  to  regain  the  volume  of  in 
surance  and  income  reached  in  1872  and  1873,  it 
only  required  seven  years  more  to  double  it.  This 
time  the  increase  came  under  healthful  financial 
conditions  ;  it  came  to  companies  which  had  been 
tried  as  by  fire  ;  and  it  came  to  stay.  The  notable 
features  of  this  period  have  been  a  decline  in  the 
interest  rate,  the  rise  of  industrial  insurance,  the 
liberalizing  of  the  policy  contract,  and  an  increase 
in  the  expense  rate. 

DECLINE  IN  INTEREST   RATE* 

During    the    First    Convention    of    Insurance 

*  The  Mutual  Life. 


38 

OflScials,  a  committee  headed  by  Mr.  D.  P.  Fackler 
reported  that  in  1870  the  companies  doing  business 
in  Massachusetts  earned  over  six  per  cent,  interest  on 
average  gross  assets.  Ex- Superintendent  William 
Barnes  submitted  a  voluminous  paper  on  the  rate 
of  interest  to  be  assumed  in  computing  a  life  com- 
pany's liabilities,  in  which  he  said  : 

"  It  is  entirely  clear  that  a  governmental  stand- 
ard for  valuations  will  be  even  more  than  safe,  if 
the  rate  of  interest  assumed  is  not  in  excess  of 
that  which  can  be  realized  by  investments  in  the 
public  funds.  An  hundred  million  dollars  can 
now  be  so  invested  at  par,  in  a  moment,  with  five 
per  cent,  interest  payable  quarterly  and  free  from 
national,  state  or  municipal  taxation.  Beyond 
reasonable  question,  investments  can  be  made  in 
the  United  States  public  funds,  for  an  indefinite 
period  of  time,  in  such  a  manner  as  to  realize  four 
and  one-half  per  cent,  interest,  compounded  an- 
nually.'' 

Other  eminent  authorities*  gave  it  as  their  opin- 
ion that  six  per  cent,  interest  would  be  obtainable 
on  first-class  securities  for  a  generation  to  come. 
Yet  six  years  later  United  States  four  per  cent, 
bonds  were'selling  at  par.     The  legal  rate  of  inter- 

*  David  A.  Vl^ells,  Sheppard  Homans,  Elizur  Wright,  David 
Parks  Fackler  and  C.  F.  McCay.  See  Report  First  Session,  pp. 
168,  167,  168,  170,  and  Second  Session,  p.  88. 


39 

est  in  the  State  of  New  York  was  reduced  from 
seven  to  six  per  cent,  in  1879,  taking  effect  on 
January  1,  1880.  In  1884  the  Legislature  enacted 
that  on  and  after  December  31,  1887,  the  official 
valuation  of  life  policies  should  be  made  upon  the 
Actuaries '  Table  of  Mortality  with  interest  at  four 
per  cent.,  instead  of  upon  the  American  Table  with 
interest  at  four  and  one-half  per  cent.  Most  of  the 
other  States  wherein  the  latter  standard  obtained 
have  made  the  same  change.  Although  this  change 
required  about  thirty  million  dollars  to  be  added 
to  the  reserve  funds  of  companies  doing  business 
in  the  State,  it  did  not  prove  greatly  burdensome 
to  the  companies,  most  of  which  had  previously 
maintained  a  reserve  by  the  higher  standard  in 
order  to  comply  with  the  requirements  of  States 
wherein  such  higher  standard  prevailed.  The  aver- 
age rate  of  interest  received  by  the  companies  doing 
business  in  New  York  from  1871  to  1897  shows  a 
decrease  of  about  one  and  one-half  per  cent.* 

It  would  not  be  a  fair  inference  from  the  fore- 
going that  the  decrease  in  the  interest  rate  will  be 
as  great  during  the  next  twenty-seven  years  as  it 
has  been  during  the  twenty-seven  just  past,  be- 
cause by  that  rule  the  rate  would  in  the  course  of 
time  reach  the  vanishing  point ;  but  we  cannot  fail 

*  See  table,  page  71 . 


40 

to  note  that,  if  the  interest  rate  realizable  on  Gov- 
ernment securities  be  taken  as  a  standard,  a  three 
per  cent,  standard  in  1898  would  be  less  conserva- 
tive than  a  four  and  one-half  per  cent,  standard 
was  in  1871.  While  I  would  h^  urge  any  change 
in  the  legal  standard  at  present,  I  would  suggest 
that  it  will  be  the  part  of  wisdom  on  the  part  of 
life  insurance  companies  to  make  gradual  provi- 
sion for  such  a  change.  Conservatism  in  the  mat- 
ter of  interest  assumptions  has  been  of  incalcula- 
ble value  to  American  Life  Insurance.  The  early- 
companies  were  obliged  to  rely  upon  English  ex- 
perience for  mortality  rates,  and  in  calculating 
their  premium  rates  they  adopted  the  English 
standards  as  to  interest  rates  also.  This  gave  a 
premium  from  which  it  has  always  been  possible 
to  make  a  reserve  at  the  highest  standard  adopted 
by  any  State.  In  the  Convention  of  1871  a  strenu- 
ous effort  was  made  by  two  stock  companies, 
which  calculated  their  premiums  on  a  six  per  cent, 
interest  rate,  to  create  an  opinion  favorable  to 
allowing  them  to  make  their  reserves  on  the  same 
interest  basis.  One  of  these  companies  was  the 
Universal,  which  failed  five  years  later,  having 
received  an  average  of  only  five  and  three-quarters 
per  cent,  during  its  whole  history ;  the  other  was 
the  National  of  U.  S.  A.,  still  solvent,  but  now 
winding  up  its  affairs.     If  the  early  interest  as- 


41 

sumptions  had  not  been  very  much  below  the  rate 
obtainable,  it  is  easy  to  see  that  all  the  early  com- 
panies might  have  been  seriously  embarrassed,  in- 
stead of  being— as  they  always  have  been— the 
very  bulwarks  of  the  business. 

RISE   OF   INDUSTRIAL   INSURANCE. 

Industrial  insurance,  although  in  operation  in 
England  since  1854,  was  first  introduced  into  this 
country  in  1878.  In  1880  three  companies  were 
issuing  this  form  of  indemnity,  and  the  amount  in 
force  at  the  end  of  the  year  was  somewhat  over 
$13,000,000.  On  December  31,  1897,  the  number  of 
policies  in  force  was  nearly  eight  millions,  insuring 
nearly  one  thousand  million  dollars.  The  amount 
insured  under  industrial  policies  now  exceeds  the 
total  life  insurance  in  force  in  this  country  prior  to 
1867.  •  Its  salient  features  have  been  (1)  weekly 
collections  of  premiums  at  the  homes  of  the  insured  ; 
(2)  the  insurance  of  the  whole  family  ;  (3)  uniform 
rates  for  males  and  females  ;  (4)  limitation  of  the 
amount  of  insurance  upon  lives  under  ten  years  of 
age  to  burial  fund  proportions.  Premmms  are  five 
cents  per  week  and  upward,  insurance  $15  and  up- 
ward. The  average  premium  is  about  ten  cents 
per  week,  and  the  average  insurance  about  $125. » 

Fortunately  for  the  business  and  for  the  insured, 
the  industrial  business  has  been  done  by  a  few  com- 


42 

panies,  and  those  doing  the  bulk  of  it  have  been 
managed  with  the  highest  integrity  and  skill. 
They  have  sought  to  furnish  insurance  that  should 
be,  first  of  all,  safe,  and  then  to  make  every  device 
for  lowering  its  cost  inure  to  the  benefit  of  policy- 
holders. The  industrial  companies  have  had  to 
overcome  anew  the  x^rejudice  which  was  formerly 
directed  against  the  companies  insuring  for  larger 
amounts.  Professional  philanthropists  have  again 
and  again  conjured  up  the  spectre  of  children 
starved  and  murdered  for  the  sake  of  an  insurance 
that  would  scarcely  afford  decent  burial.  Over 
against  the  spectre,  the  industrial  companies  have 
once  and  again  set  the  facts,  showing  care  in  the 
selection  of  risks  and  in  the  payment  of  claims, 
and  the  further  fact  that  the  mortality  among  in- 
sured infants  is  lower  than  the  average  infantile 
mortality.  -^Over  against  accusations  of  placing 
burdens  upon  poverty,  the  comi)anies  have  shown 
that  an  increase  in  industrial  insurance  has  gone 
hand  in  hand  with  an  increase  in  savings  bank  de- 
posits. • 

As  bearing  upon  the  history  of  Life  Insurance, 
several  points  must  be  noted  : 

4.  The  industrial  companies  have  immensely 
broadened  the  field  of  Life  Insurance.  •  They  have 
not  only  extended  its  benefits  to  a  large  number  of 
persons  insuring  for  small  amounts,  but  they  have 


43 

included  classes  heretofore  considered  uninsurable. 
They  have  demonstrated  that  it  is  possible  to  ascer- 
tain and  cover  by  an  adequate  premium  the  risk  of 
death  upon  practically  every  healthy  human  being 
who  is  not  living  in  flagrant  violation  of  moral  and 
hygienic  laws.  The  companies  have  been  obliged 
to  contend  with  a  death-rate  among  adults  over  twice 
as  great  as  that  which  has  prevailed  among  the 
companies  doing  an  ordinary  life  insurance  business, 
and  to  ascertain  by  actual  experience  the  death-rate 
among  children  ;  but  they  have  within  compara- 
tively few  years  obtained  the  facts,  and  reduced 
them  to  a  science,  upon  which  they  have  upreared 
the  stately  structure  of  Industrial  Insurance.  The 
number  of  industrial  policies  now  in  force  is  over 
[three  and  one-half  times  as  great  as  the  number  of 
ordinary  policies  ;  and,  while  the  amounts  are  small, 
who  shall  say  that  the  service  done  each  family  is 
not  as  great  in  the  one  case  as  in  the  other  ?  The 
poor  of  to-day  are  often  the  well-to-do  of  to-morrow, 
especially  it*  they  observe  the  rules  of  industry, 
economy  and  forethought  which  industrial  insur- 
ance is  so  well  adapted  to  teach.  Having  constantly 
before  their  eyes  the  benefits  of  insurance  in  small 
amounts,  they  will  not  fail  to  see  the  advantage  of 
larger  amounts  when  they  are  able  to  carry  them. 

2.  Again,  the  industrial  companies  have  shown 
that  it  is  worth  while  to  do  small  thiners  in  order  to 


44 

accomplish  great  things— that  the  business  will 
bear  whatever  expense  is  necessary  to  do  it  in  the 
best  way.  ^The  companies  have  learned  that  the  in- 
dustrial classes  will  not  save  money  and  pay  for  in- 
surance by  quarterly  or  monthly  premiums ;  that 
they  will  not  take  insurance  that  involves  remit- 
tances by  mail  or  by  periodical  payments  at  an 
office  ;  but  that  they  will  cheerfully  pay  the  cost  of 
it  if  it  is  brought  to  their  homes  and  sold  on  weekly 
instalments.*  In  their  personal  attention  to  policy- 
holders, in  their  management  of  details,  and  in  their 
efforts  to  cheapen  the  cost  of  insurance  to  their 
patrons,  the  industrial  companies  have  shown  a 
wisdom,  a  zeal,  an  invention  and  a  singleness  of  pur- 
pose, that  may  well  excite  the  admiration  of  their 
co-laborers  in  the  life  insurance  field.  The  condi- 
tions of  success  seemed  hard,  but  by  accepting  them 
cheerfully  aijd  paying  the  price  ungrudgingly, 
these  companies  have  earned  a  success  which  is 
conspicuous  in  the  annals  of  Life  Insurance. 

3.  If  we  look  cJosely  we  shall  perceive  that  in- 
dustrial insurance — so  far  as  it  applies  to  infants — 
has  introduced  a  new  principle.  Every  other  kind 
of  insurance  is  indemnity  for  value  lost ;  infantile 
insurance  is  indemnity  for  expense  incurred.  The 
infant  life  has  no  pecuniary  value  ;  it  does  not  pro- 
duce— it  consumes  ;  but,  if  it  ceases,  an  expense 
must  be  incurred  for  its  burial.     The  expense  of  its 


45 

maintenance,  if  it  lives,  can  be  provided  for  by  the 
earnings  of  parents,  because  tliis  expense — like 
these  earnings — will  be  so  distributed  as  to  require 
but  little  outlay  each  week ;  and  so  the  expense, 
involving  the  instant  outlay  of  a  week's  wages  or 
more,  can  be  met  in  the  same  way  by  industrial 
insurance.  It  is  not  exactly  insurance  upon  life, 
but,  in  the  language  of  the  charters  and  of  the 
law,  "insurance  pertaining  to  life."  To  my 
mind,  a  new  dignity  is  added  to  Life  Insurance 
when  it  proclaims  over  the  cradle  the  sacredness  of 
human  affection,  and  prepares  to  assuage  the  grief 
of  the  bereaved  by  the  assurance  of  Christian  burial. 

CHANGES   IN   THE   POLICY   CONTRACT. 

This  period  has  been  pre-eminently  an  era  of 
changes  in  the  policy  contract.  I^ot  only  have 
many  new  policy  forms  been  introduced,  but  all 
the  old  forms  have  been  made  more  specific  and 
more  liberal  with  respect  to  the  rights  of  policy- 
holders. The  old  rivalry  between  companies  as  to 
the  amount  of  the  annual  dividend — which  was 
always  contingent — has  given  way  to  a  rivalry  as 
to  benefits  which  may  be  guaranteed  in  the  policy. 
The  system  of  annual  dividends  has  been  super- 
seded to  a  very  large  extent  by  long-dividend 
periods,  with  the  options  of  continued  insurance, 
or  cash  value  at  the  end  of  the  first  dividend  period. 


46 

The  option  of  cash  value  is  also  made  available  un- 
der many  policies  at  the  end  of  other  periods.  This 
change  had  its  origin,  as  we  have  seen,  as  far  back 
as  1869,  and  it  received  a  new  impetus  when  the  first 
10-year  dividend  policies  began  to  mature.  In  1880 
Massachusetts  enacted  the  first  cash  surrender  value 
law,  and  the  practice  of  guaranteeing  cash  surren- 
der values  at  definite  periods  was  soon  after  adopted 
by  most  companies,  even  though  annual  dividends 
were  continued.  All  companies  now  guarantee 
cash  surrender  values.  The  companies  which  first 
adopted  the  Tontine  system  restored  the  non-for- 
feiture clause,  and  have  been  among  the  foremost 
in  liberalizing  the  contract. 

Other  new  features  introduced  have  had  for  their 
chief  ends :  (1)  To  relieve  the  policy-holder  from 
vexatious  restrictions  ;  (2)  to  assist  him  in  keeping 
the  policy  in  force  ;  and  (8)  to  provide  for  its  certain 
and  prompt  payment  at  maturity.  The  restrictions 
removed  have  been  chiefly  those  relating  to  occupa- 
tion, to  residence  and  travel,  and  to  the  personal 
habits  of  the  insured.  The  usages  of  forty- two 
companies  now  doing  business  in  the  United  States 
may  be  summarized  as  follows  : 

Residence  and  Travel.  The  policies  of  sixteen 
companies  contain  no  restrictions  upon  residence 
and  travel ;  six  companies  impose  restrictions  dur- 
ing the  first  policy  year  only  ;  seventeen  companies 


impose  restrictions  during  the  first  two  years  of  the 
policy ;  one  company  imposes  restrictions  during 
the  first  three  years  of  the  policy ;  and  two  com- 
panies make  restrictions  continuous. 

Occttpation.  The  policies  of  ten  companies  im- 
pose no  restrictions  upon  occupation ;  six  com- 
panies impose  restrictions  during  the  first  year  of 
the  policy ;  twenty  companies  impose  restrictions 
during  the  first  two  years  of  the  policy  ;  one  com- 
pany imposes  restrictions  during  the  first  three 
years  of  the  policy ;  and  five  companies  make  re- 
strictions continuous. 

Military  and  Naval  Service.  The  policies  of 
nine  companies  contain  no  restrictions  upon  mili- 
tary or  naval  service  ;  six  companies  impose  restric- 
tions during  the  first  two  years  of  the  policy ; 
twenty-seven  companies  impose  restrictions  during, 
the  continuance  of  the  policy.  Among  the  latter 
class  there  is  a  considerable  diversity  in  the  treat- 
ment of  this  risk.  The  terms  actually  accorded  to 
policy-holders  m  the  military  and  naval  service  of 
the  United  States  during  the  present  war,  while 
showing  equally  great  diversity,  have  usually  been 
more  liberal  than  those  provided  under  the  com- 
panies' contracts. 

Intoxicants  and  Narcotics.  The  policies  of  seven 
companies  become  void,  or  may  be  canceled  during 
a  limited  period,  in  case  of  the  excessive  use  of  in- 


48 

toxicants  or  narcotics.  In  some  cases  the  reserve, 
or  the  premiums  paid,  are  returned.  Seven  com- 
panies require  the  applicant  to  warrant  that  he  is 
temperate.  The  policies  of  twenty-eight  com- 
panies contain  no  restrictions  on  these  points,  al- 
though the  applicant's  habits  are  inquired  into. 

The  changes  in  the  policy  contract  designed  to 
assist  the  policy-holder  directly  in  keeping  it  in 
force  are  :  (1)  grace  in  the  payment  of  premiums  ; 
(2)  the  privilege  of  reinstatement ;  (3)  loans  on  the 
policy ;  (4)  automatic  non-forfeiture  conditions. 
The  usage  of  the  companies  upon  these  points  is  as 
follows : 

Days  of  Grace.  The  policies  of  sixteen  com- 
panies provide  that  a  grace  of  thirty  days,  or  of 
one  calendar  month,  shall  be  allowed  in  the  pay- 
ment of  premiums ;  the  policies  of  twenty-six 
companies  make  no  concessions  on  this  point. 

Privilege  of  Reinstatement.  The  policies  of 
fifteen  companies  make  provision  for  reinstate- 
ment within  periods  ranging  from  thirty  days  to 
twelve  months  ;  the  policies  of  twenty -seven  com- 
panies contain  no  assurance  on  this  point. 

Loans.  The  policies  of  seven  companies  make 
provision  for  loans  after  being  in  force  two  years, 
those  of  sixteen  after  three  years,  those  of  five 
after  five  years  ;  the  policies  of  fourteen  companies 
make  no  provision  for  loans. 


49 

Non-Forfeiture  Conditions,  The  non-forfeiture 
conditions  of  thirty-one  companies  are  automatic 
in  their  operation,  so  that  an  insurance  value  once 
acquired  under  a  policy  cannot  be  lost ;  the  policy- 
holder receives  it  in  some  form  whether  he  makes 
request  for  it  or  not.  The  policies  of  eleven  com- 
panies require  some  action  by  the  insured  within  a 
limited  time  in  order  to  receive  the  benefits  of  the 
non-forfeiture  clause  ;  the  policies  of  twenty-seven 
companies  allow  a  choice  between  extended,  and 
ordinary  paid-up,  insurance  ;  the  policies  of  fifteen 
companies  make  provision  for  but  one  form  of 
paid-up  value.  Of  the  twenty-six  companies 
which  allow  extended  insurance,  eighteen  deduct 
the  premiums  falling  due  under  the  original  con- 
tract, in  case  of  death  within  a  limited  period ; 
eight  companies  make  no  deduction. 

Incontestability.  The  policies  of  thirty-six  com- 
panies contain  clauses  making  them  incontestable 
under  certain  conditions  ;  the  policies  of  six  com- 
panies contain  no  such  clauses.  Of  the  thirty-six, 
fifteen  make  their  policies  incontestable  after  a  cer- 
tain period  upon  the  single  condition  that  premiums 
or  notes  given  therefor,  with  interest,  be  paid  as 
agreed.  Of  the  fifteen,  one  makes  its  policies  incon- 
testable upon  delivery,  three  after  one  year,  eleven 
after  two  years.  The  incontestable  clauses  of  the 
remaining  twenty-one  companies  all  contain  some 


50 

further  condition  which  is  binding  during  the  life 
of  the  policy ;  but,  subject  thereto,  the  clause  is 
made  operative  by  one  company  from  date  of  issue, 
by  seven  companies  after  one  year,  by  eleven  com- 
panies after  two  years,  and  by  two  companies  after 
three  years. 

Suicide.  The  policies  of  seven  companies  con- 
tain no  suicide  clause ;  the  policies  of  eight  com- 
panies do  not  assume  the  risk  of  death  from 
self-destruction  during  the  first  year ;  those  of 
twenty-one  companies  do  not  assume  it  during  the 
first  two  years  ;  those  of  four  companies  do  not  as- 
sume it  during  the  first  three  years  ;  and  the  poli- 
cies of  two  companies  never  assume  it  unless  it  is 
proved  to  be  involuntary  or  the  result  of  insanity. 

This  review  shows  a  great  diversity  of  treatment 
of  the  various  conditions  of  insurance  and  of  the 
privileges  allowed  under  the  policy  contract.  The 
encouraging  feature  of  it  is,  the  liberality  of  all 
contracts  as  compared  with  those  of  twenty  years 
ago,  and  the  evident  effort  which  the  companies 
are  making  to  remove  unnecessary  restrictions 
upon  the  action  of  the  policy-holder,  to  give  him 
as  much  assistance  in  keeping  up  his  policy  as  is 
deemed  consistent  with  the  highest  good  of  all,  to 
make  sure  that  he  shall  not  lose  acquired  values  by 
neglect  or  oversight,  and  to  give  him  the  strons:est 
assurance  possible  that  no  contest  will  be  made 


51 

over  the  final  payment  of  his  policy.  As  a  chain 
is  no  stronger  than  its  weakest  link,  so  every  con- 
dition and  every  restriction  imposed  upon  the  pol- 
icy-holder between  the  delivery  of  the  contract  and 
its  payment  as  a  claim,  creates  a  possibility  of  fail- 
ure. It  may  be  remote,  infinitesimal,  but  it  is 
there,  as  a  menace,  and  as  a  preventive  of  that  cer- 
tainty which  the  policy-holder  seeks  in  insuring. 
The  fewer  such  conditions  and  restrictions  that  are 
allowed  to  remain  in  the  policy,  the  fewer  chances 
there  will  be  of  failure.  The  tendency  already 
noted  in  the  management  of  industrial  companies 
has  done  much  for  the  better  security  of  policy- 
holders in  the  companies  doing  an  ordinary  busi- 
ness. That  tendency  is  to  give  the  best  possible 
protection,  taking  no  advantage  of  the  policy- 
holder' s  ignorance,  neglect  or  misfortune,  but  seek- 
ing to  provide  against  these  by  doing  for  him 
whatever  he  will  not  do  for  himself,  provided  only 
he  pays  the  cost.  This  is  insurance  that  insures, 
when  a  company  takes  no  man's  money  without 
rendering  an  equivalent  in  protection,  according  to 
the  expense  incurred. 

THE   EXPENSE   RATE. 

No  review  of  this  period  would  be  complete 
which  failed  to  take  note  of  the  increased  expense 
ratio  at  which  the  business  has  been  transacted. 


62 

In  1871  the  ratio  of  expenses  and  taxes  to  x^^e- 
miums  for  insurance  was  21.61  per  cent. — the  high- 
est point  it  had  yet  reached.  It  then  steadily- 
declined  to  17.38  per  cent,  in  1875— the  lowest 
point  since  reached.  From  1875  it  increased  to 
30.47  per  cent,  in  1894— the  highest  point  yet 
reached;  and  from  that  it  declined  to  29.28  per 
cent,  in  1897.  The  Wisconsin  Insurance  Keport 
of  the  present  year  shows  that  the  expenses  and 
taxes  of  all  companies  doing  business  in  the  State 
were  98  per  cent,  of  the  loading  earned  on  pre- 
miums received.  If  we  add  to  the  loading  the 
gain  on  lapsed  and  surrendered  policies,  consid- 
ering it  as  a  "surrender  charge"  to  be  used  in 
replacing  retiring  risks,  expenses  will  then  be  83 
per  cent,  of  the  total  amount  available  for  ex- 
penses. 

I  have  on  other  occasions  expressed  the  opinion 
that  expenses  are  too  high,  and  there  is  no  phase 
of  the  business  to  which  I  have  given  more  care- 
ful attention  than  this.  I  may  say,  however, 
after  an  experience  of  six  years  as  chief  execu- 
tive officer  of  a  large  company,  that  it  is  much 
easier  to  criticise  the  rate  of  expense  than  it  is  to 
say  where  a  reduction  should  be  made.  While 
we  have  made  some  progress  in  this  direction,  I 
am  compelled  to  admit  that  progress  must  be 
slow,   and  that  the  ratios  of  a  quarter  of  a  cen- 


tury  ago  are  not  likely  to  prevail  again  for  many 
years — if  ever.  An  examination  of  the  expense 
ratio  since  1871  shows  that  the  years  when  it  was 
lowest  were  the  years  when  comparatively  little 
new  business  was  done,  and  when  Life  Insurance 
as  a  whole,  was  retrograding.  The  question  must 
be  looked  at  from  various  standpoints  in  order 
to  determine  whether  or  not  a  given  ratio  is  too 
high.  The  business  is  free  to  all  comers,  and 
there  are  over  fifty  level  premium  companies  do- 
ing business  in  the  United  States.  They  are  all 
anxious  to  reduce  the  rate  of  expense,  and  each 
one  has  an  opportunity  to  strengthen  its  appeal 
for  business  by  so  doing.  Under  such  circum- 
stances it  would  seem  that  the  expense  rate  would 
tend  to  regulate  itself  under  the  stress  of  compe- 
tition, here  as  elsewhere.  There  are  very  few 
things  so  well  done  that  no  improvements  can  be 
suggested  ;  but,  in  practice,  the  improvements  are 
not  always  possible. 

Again,  we  may  look  at  the  question  with  refer- 
ence to  the  compensation  received  by  those  who  do 
the  work.  It  must  be  remembered  that  it  is  a 
business  requiring  as  great  talent  and  skill  as  any 
of  the  great  commercial  interests  of  the  country — 
banking,  transportation,  merchandising— and  that 
it  is  concentrated  in  comparatively  few  hands.  1 
venture  to  say  that  the  number  of  persons  who  are 


54 

receiving  large  incomes  in  the  life  insurance  busi- 
ness is  smaller  in  comparison  with  the  business 
itself  and  in  comparison  with  the  responsibility 
incurred,  than  in  either  of  the  other  callings  men- 
tioned. The  salaries  of  all  officers  and  Home  Office 
employes — who  are  usually  supposed  to  enjoy 
princely  incomes — comprise  less  than  nine  per 
cent,  of  the  total  expenses  of  the  Jife  companies ; 
while  taxes,  licenses  and  fees  imposed  by  law  in 
the  various  States  are  equal  to  nearly  five  per  cent. 
of  the  total.  Shall  we  say  that  the  agents  are 
overpaid  ?  The  great  majority  of  life  agents — like 
the  great  majority  of  men  in  every  calling — have 
hard  work  to  make  a  living.  Of  the  4,000  or  more 
agents  in  the  employ  of  the  New  York  Life  Insur- 
ance Company  in  the  United  States  in  1897,  a  large 
proportion  of  whom  devoted  all  their  time  to  the 
work,  only  841  wrote  over  $50,000  insurance  during 
the  year;  none  of  the  remaining  3,000  odd  could 
have  got  from  his  commissions  an  income  of  $1,000 
and  many  got  much  less.  In  contrast  with  this, 
Mr.  Edward  Atkinson  estimates  the  average  wages 
of  8i)ecially  skilled  men  in  the  mechanical  trades 
at  over  $1,200  per  year,  and  those  of  average 
mechanics  at  over  $700  per  year.* 
It  will  probably  be  said  that  the  companies  are 

♦  "  Industrial  Prop*e88  of  the  Nation,"  page  169. 


55 

too  eager  for  new  business,  and  that  they  spend  too 
much  money  in  order  to  make  a  favorable  showing 
in  this  respect.  Suppose  we  apply  the  same  criti- 
cism to  other  great  enterprises.  Open  your  morn- 
ing paper  and  read  the  expensive  advertisements. 
These  people  are  doing  business  for  profit  —why  not 
save  all  this  money  ?  Besides  this  expensive  pub- 
licity, wholesale  merchants  and  manufacturers  em- 
ploy methods  similar  to  those  of  the  life  companies, 
by  maintaining  agencies  in  many  cities  and  em- 
ploying an  army  of  traveling  salesmen.  They  will 
all  tell  you  that  these  expenses  are  necessary  in 
order  to  sell  goods.  The  opposite  method  has  been 
tried  in  life  insurance.  The  Equitable,  of  London, 
pays  no  commissions  to  agents  ;  it  has  been  in  ex- 
istence one  hundred  and  thirty-six  years  ;  and  it 
has  about  $35,000,000  of  insurance  in  force.  It 
issues  less  than  four  hundred  policies  a  year.  No 
doubt  it  takes  good  care  of  such  as  come  to  it ; 
they  get  their  insurance  at  a  low  rate  ;  but  very  few 
people  would  ever  enjoy  the  benefits  of  life  insurance 
if  all  companies  pursued  such  a  policy.  Isn't  it 
better  for  the  community  that  life  insurance  should 
be  placed  before  every  man  and  urged  upon  every 
man,  even  at  the  cost  incurred  by  American  com- 
panies, than  that  a  few  should  receive  its  benefits 
at  a  low  rate  ?  The  object  of  a  life  insurance  com- 
pany should  be,  first,  to  insure  men  at  some  rate  ; 


56 

and,  second,  to  make  the  rate  as  low  as  is  consistent 
with  safety  and  with  the  fulfillment  of  its  reason 
for  existence. 

While  I  believe  earnest  and  persistent  efforts 
should  be  made  to  reduce  the  expense  rate,  I  do  not 
believe  in  a  cheese-paring  policy.  ''The  laborer  is 
worthy  of  his  hire,"  and  the  man  who  labors  faith- 
fully for  life  insurance  should  be  able  to  live  by 
life  insurance.  The  most  inviting  field  for  effort 
seems  to  be  the  prevention  of  lapses.  The  second 
year  is  the  critical  period,  and  the  ratio  of  lapses  in 
all  companies  doing  any  considerable  volume  of 
business  is,  and  always  will  be,  high  at  that  point. 
Various  theories  have  been  tested  by  different  com- 
panies, and  contracts  have  been  made  without  re- 
newal commissions  to  the  agent,  and  again  with 
renewal  c6mmissions.  The  results  as  shown  by  the 
reports  to  the  Insurance  Department  indicate  that 
the  renewal  commission  has  had  little,  if  any, 
effect  in  reducing  the  lapse  ratio,  and  companies 
which  offer  a  standard  form  of  agency  contract 
based  on  a  renewal  commission  to  the  agent,  find 
their  business  going  off  the  books  just  about  as 
rapidly  as  the  business  of  companies  operating 
solely  on  a  brokerage  basis. 

The  insured  stands  more  nearly  alone  when  he 
faces  his  second  payment.  Even  if  the  agent  who 
wrote  the  application  is  present,  and  has  interests 


57 

to  be  subserved,  other  considerations  predominate. 
The  inevitable  reaction  from  the  work  of  the  re- 
bater  asserts  itself  at  this  point.  In  my  judg- 
ment, the  greatest  cause  of  abnormal  and  improper 
lapse  in  the  second  year  is  the  deplorable  and  in- 
defensible work  of  the  "Lightning  Agent"  or 
"Executive  Special" — the  Arch  Rebater.  There 
are  natural  and  unavoidable  forces  at  work  which 
will  make  the  lapses  of  the  second  year  higher, 
perhaps,  than  in  any  other  year.  These  causes  we 
can  never  entirely  eliminate — they  are  a  part  of 
the  business.  We  can  only  hope  by  wise  manage- 
ment to  reduce  the  loss  to  the  lowest  practicable 
point ;  but  the  man  who  was  tempted  to  take  his 
insurance  in  the  first  instance  because  the  agent 
submitted  a  proposition  which  appealed  to  the 
gambling  instinct  of  humanity,  a  proposition  which 
substantially  offered  to  give  him  something  for 
nothing,  not  only  has  no  intention  of  paying  the 
second  premium,  but  he  has  been  initiated  into  a 
vice  which  spreads  like  a  contagious  disease :  it 
not  only  ruins  him,  but  it  contaminates  and  ruins 
his  neighbor,  and  ultimately  ruins  the  agent. 

The  second  year  brings  a  man  seriously  face  to 
face  with  the  obligations  of  his  contract.  If  he 
was  well  and  honestly  insured  in  the  beginning,  if 
he  paid  one  hundred  cents  on  the  dollar,  he  is 
mentally  quite  ready  to  go  on.     The  demand  for 


58 

the  second  premium  brings  no  element  with  which 
he  is  not  already  familiar,  and  raises  no  question 
which  he  does  not  aleady  understand.  He  feels 
that  he  has  had  nothing  in  the  first  year  for  which 
he  has  not  paid,  and  consequently  he  is  not  men- 
tally upset  when  he  meets  the  conditions  of  the 
second  year  which  exact  the  same  cost  for  the  same 
protection.  On  the  other  hand,  when  the  man  who 
received  a  rebate  the  first  year  is  brought  face  to 
face  with  the  serious  part  of  his  contract,  which 
dates  from  the  second  premium,  he  is  mentally  in 
the  condition  of  a  gambler.  He  got  something  for 
nothing  the  first  year ;  or  perhaps,  more  correctly 
speaking,  he  got  a  great  deal  for  a  payment  that 
was  inadequate  and  improper,  and  it  is  human 
nature  for  him  to  want  the  same  thing  the  second 
year.  It  is  natural  for  him  to  shrink  from  paying 
the  lawful  price  which  the  second  year  exacts,  and 
he  dodges  the  obligation  which  thereafter  he  can- 
not shirk,  refusing  to  put  more  money  into  a  con- 
tract which  from  that  time  forth  puts  him  on  a 
level  with  other  men. 

We  cannot  entirely  overcome  what  I  have  called 
the  natural  conditions  surrounding  the  payment  of 
the  second  premium.  Men's  surroundings  change. 
Even  when  there  is  no  rebate  offered,  men  may  be 
overpersuaded  by  the  influence  of  a  stronger  mind. 
There  are  men  who  have  a  proper  sense  of  obliga- 


59 

tion  toward  their  families  only  spasmodically. 
All  these  things  affect  our  business  just  at  this 
point,  and  always  will.  We  can,  however,  to  a 
very  large  degree,  control  the  evil  work  of  the  re- 
bater.  Legislation  on  this  subject  has  done  some- 
thing, but  we  have  learned  from  bitter  experience 
that  it  cannot  reach  the  real  seat  of  the  trouble. 
The  one  power  that  can  effectually  check  the  re- 
bate evil  is  the  Executive  Head  of  each  company 
doing,  business.  If  the  agents  of  all  companies 
understood  that  rebating  was  really  prohibited, 
not  only  by  law,  but  by  the  explicit  direction  of 
the  Home  Office  of  the  companies  they  represent, 
and  that  back  of  that  explicit  direction  was  a  fixed 
purpose  to  execute  it,  the  evil  would  be  largely  de- 
creased. A  merely  passive  desire  on  the  part  of 
Executive  Officers  will  accomplish  very  little.  The 
determination  to  abate  what  is  more  than  a  nuis- 
ance must  assume  an  aggressive  form.  The  agent 
must  understand  that  his  superior  officers  will  not 
only  notice  a  case  of  rebate  if  it  is  thrust  in  their 
faces,  but  he  must  also  understand  that  they  are 
looking  for  evidence,  not  only  against  the  agent  of 
some  other  company,  but  against  him,  and  that  if 
evidence  is  found,  punishment  will  be  swift  and  cer- 
tain. Even  this  will  not  wholly  exterminate  the  evil 
practice.  Men  will  occasionally  steal,  notwithstand- 
ing the  statute   law  and  the  Ten  Commandments. 


60 

I  hold,  therefore,  that  agency  contracts  should 
be  made  on  the  theory  that  "  the  laborer  is  worthy 
of  his  hire,"  and  that  a  good  man  is  entitled  to  a 
good  living.  The  apparently  high  expense  rate  of 
the  first  year  that  goes  with  this  theory  is  per- 
fectly legitimate  and  necessary,  and  in  my  judg- 
ment Life  Insurance  cannot  otherwise  be  prose- 
cuted with  sufficient  vigor  to  fulfill  its  true  mis- 
sion. But  contracts  which,  to  an  outsider,  appear 
to  have  been  cunningly  devised  for  the  purpose  of 
helping  the  agent  to  rebate,  are  quite  a  different 
proposition.  The  old  style  renewal  contract  was 
not  devised  for  this  purpose,  but  in  very  many 
ways  it  has  practically  operated  to  this  end.  There 
are  styles  of  agency  contracts  in  force  to-day,  the 
product  of  a  later  age,  which  convey  the  impres- 
sion that  they  are  intended  to  place  in  the  hands 
of  the  agent  exactly  the  tools  which  he  needs  to 
carry  on  this  most  nefarious  trade. 

Rebating  and  lapsing  are  twins,  and  if  I  may 
perpetrate  an  Irish  '*  bull,"  twins  born  a  year  apart. 
The  lapse  follows  the  rebate,  and  the  rebate  is  a 
direct  offshoot  of  improper  relations  between  the 
agent  and  his  Home  Office.  This  brings  the  matter 
directly  home  to  those  of  us  who  hold  executive 
positions,  and  raises  the  question  as  to  what  kind 
of  agency  contract  will  secure  new  business  in  the 
best  way,  and  by  that  means  reduce  lapses  to  a 


61 

normal  level  the  second  year.  In  attempting  to  an- 
swer this  question,  I,  of  course,  presuppose  that 
the  Home  Office  is  unalterably  opposed  to  rebating, 
and  is  determined  to  stop  it,  and  that  it  cannot  be 
temi)ted  by  any  mere  volume  of  business  into  wink- 
ing at  facts  which  indicate  its  existence,  nor  in- 
duced to  retain  in  its  service  either  the  large  writer 
or  the  small  writer  if  he  has  been  clearly  guilty  of 
the  rebate  offense. 

Assuming  that  such  executive  intention  exists, 
the  rebate  evil  and  its  twin,  lapse,  are  not  uncon- 
trollable. Any  working  system  which  will  make  it 
to  the  interest  of  the  agent  to  do  his  business  hon- 
orably from  the  beginning  will  tend  to  check  the 
lapse  rate.  The  industrial  comjDanies  have  found 
that  their  best  way  of  accomplishing  this  is  to  pay 
a  commission  on  the  increase  in  premiums  in  force. 
This  charges  up  all  lapses  to  agents — so  far  as  com- 
missions on  new  premiums  are  concerned — and  acts 
as  a  wholesome  check  on  the  writing  of  poor  busi- 
ness and  on  the  lapsing  of  business  which  ought  to 
persist.  Whatever  we  may  think  of  the  applicabili- 
ty of  industrial  insurance  methods  to  insurance  under 
large  amounts,  we  must  admit  that  the  industrial 
companies  have  overcome  difficulties  that  seemed 
insurmountable,  and  that  their  experience  and  their 
ways  of  solving  the  problems  that  have  faced  them 
may  at  least  furnish  useful  hints  to  the  rest  of  us. 


62 

In  the  company  with  which  I  am  connected  we 
have  devised  a  plan  for  binding  the  agent  closely 
and  directly  to  the  Home  Office,  transforming  his 
calling  into  a  permanent  one,  elevating  his  standard 
of  character  and  of  the  treatment  due  to  his  clients. 
This  plan  is  briefly,  a  system  of  annuities  to  agents, 
beginning  after  a  definite  period  of  service,  fixed  in 
amount  by  the  persistency  of  the  business  issued 
as  well  as  its  volume  (in  this  feature  embodying 
the  essence  of  the  industrial  companies'  idea  as  to 
compensation  of  agents),  and  continuing  under 
well-defined  conditions  for  life.  The  results  in  our 
experience  are  already  marked  and  gratifying,  and, 
while  sufficient  time  has  not  yet  lapsed  to  afford  a 
complete  demonstration,  I  am  satisfied  that  we 
have  taken  a  step  in  the  right  direction. 

I  have  said  so  much  by  way  of  criticism  that  I  am 
sure  no  one  will  grudge  me  a  paragraph  in  praise 
of  the  benefits  which  Life  Insurance  has  conferred 
during  the  past  twenty-seven  years.  The  com- 
panies have,  during  that  time,  received  from 
policy-holders  over  three  thousand  million  dol- 
lars ;  they  have  paid  over  one  thousand  millions 
in  death-claims,  and  nearly  as  much  more  in 
endowments,  annuities,  dividends  and  surrender 
values.  It  will  help  us  to  appreciate  the  signifi- 
cance of  these  figures  if  we  compare  them  with 


63 

others  which  more  strikingly  impress  the  imagina- 
tion. A  third  of  a  century  ago  a  terrible  civil  war 
raged  in  this  country  for  four  years.  The  number 
of  deaths  in  the  Federal  armies  is  officially  stated 
to  have  been  over  350,000 ;  the  National  debt 
at  the  close  of  the  war  exceeded  twenty- 
seven  hundred  million  dollars ;  and  the  Govern- 
ment has  since  paid  in  pensions  over  twenty- 
one  hundred  millions.  The  debt  was  so  great 
that  the  Nation's  ability  to  pay  it  was  openly 
questioned,  and  our  pension  legislation  has  been 
the  most  liberal  the  world  has  ever  seen ;  yet, 
since  1871,  we  have  paid  out  for  Life  Insurance 
more  than  the  amount  of  the  National  debt  when 
at  its  highest  point,  and  the  payments  of  the  life 
companies  to  their  members  have  nearly  equaled 
the  disbursements  of  the  Government  on  account 
of  pensions.  The  Nation  poured  out  blood  and 
treasure  like  water,  and  laid  a  heavy  burden  upon 
posterity,  that  it  might  insure  its  own  integrity 
and  perpetuity  ;  under  Life  Insurance,  individuals 
have  freely  paid  these  vast  sums  that  they  might  in- 
sure the  integrity  and  perpetuity  of  their  families, 
and  that  their  posterity  might  be  free.  The  patriot 
who  gives  his  life  for  his  country,  and  the  man 
who  insures  his  life  for  the  protection  of  his 
family,  alike  link  their  being  with  the  future  by 


64 

unselfish  devotion  to  present  duty,  and  though 
they  perish  outwardly,  they  still  live 

**  In  minds  made  better  by  their  presence  ;  live 
In  pulses  stirred  to  generosity, 
In  deeds  of  daring  rectitude,  in  scorn 
For  miserable  aims  that  end  with  self, 
In  thoughts  sublime  that  pierce  the  night  like  stars, 
And  with  their  mild  persistence  urge  man's  search 
To  vaster  issues." 


65 


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67 


RECEIPTS  AND  DISBURSEMENTS  OF  ALL  LIFE  COMPANIES 

EXDING  BUSINESS  IN  THE  UNITED  STATES,  DURING 

THE  27  YEARS,  1871-1897. 

Insurance  Premiums $3,139,293,003 

Annuity  Premiums 49. 155.951 

Interest  and  Rents 879,830. 767 

Total  Income $4,068,279,721 

Death-Claims  Paid $1,051,006,646 

Endowments 84,951,640 

Annuities 29,524,064 

Surrender  Values 426,250,525 

Dividends 413,857,241 

Total  to  Policy-holders $2,005,590,116 

Expenses  and  Taxes $828,302,848 

77  companies — Assets  January  i,  1871 $272,129,969 

77  companies — Surplus  January  i,  1871 i}^49,2i4,2o6 

56  companies— Assets  January  i,  7898 $1,344,589,632 

56  companies — Surplus  January  i,  1898 $187,794,037 

77  companies — Insurance  in  Force  January  i,  1871  ..  $2,046,254,488 
56  companies — Insurance  in  Force  January  i,  1898  . .  $5,328,072,646 

Industrial  Insurance  in  Force  January  I,  1898 $987,110,692 


LIFE  INSURANCE  IN  ITS  RELATIONS 
TO  THE  PUBLIC. 

JOHN  M.  PATTISON  : 

1  ESTEEM  it  a  great  privilege  to  meet  the  super- 
intendents of  the  insurance  departments  of  the 
different  States,  but  before  beginning  the  discussion 
of  the  topic  assigned  me,  I  desire  to  remove  from 
the  minds  of  some  of  you  any  mistaken  impressions 
which  you  may  have  received  in  regard  to  my  posi- 
tion upon  the  subject  of  State  and  National  super- 
vision. I  have  been  asked  if  it  has  not  been  inju- 
dicious for  me  publicly  to  advocate  National  super- 
vision, because  by  so  doing,  I  would  incur  the  dis- 
pleasure of  the  State  commissioners,  and  that  they 
should,  therefore,  discriminate  against  the  company 
I  have  the  honor  to  represent.  I  have  answered 
*'No,"  not  in  the  least;  that  no  State  Superin- 
tendent whom  it  has  been  my  pleasure  to  know, 
would  ever  use  his  power  to  the  injury  or  annoy- 
ance of  the  Union  Central  on  account  of  a  differ- 
ence with  its  President  on  this  or  any  other  sub- 


69 

ject,  so  long  as  the  difference  of  opinion  was  an 
honest  one.  I  have  always  claimed,  and  now 
claim,  that  a  large  majority  of  the  State  commis- 
sioners are,  or  would  be,  in  favor  of  National  su- 
pervision on  the  lines  many  of  us  have  advocated, 
if  they  clearly  understood  our  position.  No  active 
friend  of  National  supervision  has  ever  advocated 
the  abolishment  of  the  insurance  department  of 
any  State.  On  the  contrary,  our  position  has  al- 
ways been  accompanied  with  the  provision  that 
the  insurance  department  of  each  State  shall  be 
continued,  and  that  each  of  the  forty-five  States 
shall  have  its  own  insurance  commissioner,  just 
as  it  has  its  own  Governor  ;  that  under  the  laws  of 
each  State  the  insurance  department  shall  have 
control  of  all  companies  organized  within  the 
State,  and,  so  long  as  such  companies  confine  their 
operations  within  the  State,  the  State  control  shall 
be  absolute,  and  the  National  department  shall 
have  nothing  whatever  to  do  with  such  companies. 
Should  they,  however,  go  into  other  States,  then, 
so  far  as  their  business  is  concerned  in  other 
States,  they  shall  be  under  the  charge  of  the  Na- 
tional department. 

If  it  is  possible  for  the  managers  or  presidents 
of  all  the  life  and  fire  insurance  companies  of  the 
United  States  to  agree  upon  anything,  they  should 
certainly  do  so  on  this  greatest  of  all  subjects, 


70 

National  supervision.  I  trust  it  will  still  have 
the  earnest  support  of  a  majority  of  the  insurance 
press.  It  should  be  most  earnestly  advocated  first 
by  the  presidents  of  the  three  great  New  York 
companies,  because  they  have  larger  interests  in 
their  charge  ;  and  so  far  as  I  am  informed,  the 
presidents  of  all  of  them  are  among  its  warmest 
and  strongest  friends.  These  should  be  followed 
by  the  managers  and  presidents  of  the  other  com- 
panies, and  if  they  should  fail  at  any  stage,  then 
the  agents  of  all  the  companies  should  take  up 
the  battle ;  and  if  they  are  not  successful,  then 
they  should  take  their  policy-holders  into  their 
counsels  and  with  these  allies,  success  will  be 
assured. 

The  policy-holders  are  the  ones  who  will  be  speci- 
ally benefited,  and  it  is  the  duty  of  the  officers 
and  directors  of  all  these  various  companies  to 
use  their  best  efforts  to  secure  National  supervision 
for  the  benefit  and  better  security  of  these  millions 
of  policy-holders. 

No  one  has  a  higher  appreciation  of  the  benefits 
of  a  wise,  judicious  and  honest  supervision  of  the 
various  State  departments  than  myself  ;  but  how- 
ever able  and  competent  any  State  insurance 
department  is,  or  can  be  made  to  be,  I  am  sure  all 
of  you  will  agree  that  no  State  department  as  now 
constituted  can  properly  look  after  any  more  than 


71 

the  companies  organized  in  its  own  State ;  and 
these  examinations  made  by  commissioners  of 
other  States  every  ten  or  twenty  years,  cannot  in 
the  nature  of  things,  be  very  satisfactory,  even 
though  made  with  ample  time  and  great  expense. 
With  a  National  department  and  civil  service, 
every  company  would  be  the  ward  of  the  depart- 
ment and  the  affairs  of  each  company  would  very 
soon  be  as  fully  and  completely  controlled  and 
understood  as  are  to-day  the  company  of  Ohio, 
by  the  Ohio  department,  those  of  Wisconsin  by 
the  Wisconsin  commissioner ;  and  the  policy- 
holders of  all  companies,  and  of  all  States,  would 
have  the  benefit  of  an  additional  supervision,  which 
would  give  them  additional  confidence  in  the  abso- 
lute security  of  their  policies. 

National  supervision  of  some  kind  is  sure  to 
come,  and  its  coming  is  only  a  question  of  time. 
Its  enthusiastic  advocacy  by  you  as  commissioners 
of  the  various  States,  guardians,  as  you  are,  of  the 
best  interests  of  the  policy-holders,  will  certainly 
do  more  than  any  other  thing  to  bring  it  about ; 
and  you  will  pardon  me  for  saying  that  you  could 
do  no  other  one  thing  that  would  inure  so  much  to 
the  benefit  of  the  millions  of  your  constituents  who 
carry  policies  of  life  insurance. 

As  to  State  supervision,  I  wish  to  say  that  I  am 
one  of  its  most  earnest  advocates,  and  I  do  not  care 


72 

how  often  yon  visit  Cincinnati,  so  long  as  yon  do 
not  reduce  thie  surplus  of  our  policy-holders ;  in 
fact,  our  ''  latch  string  is  always  out." 

It  is  no  fault  of  yours  that  the  laws  of  some  of 
your  States  compel  you  to  see  how  much  money 
you  can  obtain  for  the  State  treasury  out  of  the 
trust  funds  belonging  to  the  i3olicy-holders,  rather 
than  to  see  how  much  you  can  save  for  them.  I 
hope  the^time^will  come  in  the  official  life  of  each 
of  you,  when  you  will  have  such  influence  with  the 
law-making  powers  of  your  respective  States,  as 
our  worthy  host  and  some  of  his  predecessors  have 
had  in  the  State  of  Wisconsin,  so  that  you  can 
carry  out  your  ideas,  and  the  true  intent  of  an  in- 
surance department,  by  securing  what  is  for  the 
benefit  of  the  insured ;  and  to  do  this,  you  will 
recommend  the  abolishment  of  all  laws  whereby 
the  policy-holders'  money  is  used  for  any  purpose, 
except  for  a  liberal  maintenance  of  the  department 
itself,  and  all  its  necessary  expenses.  For  any 
State  to  demand  or  exact  more  than  this  from  the 
fund  belonging  to  the  prudent  policy-holders  and 
the  widows  and  children  as  their  beneficiaries, 
would  be,  and  is  almost  as  bad  as  the  worst  high- 
way robbery.  To  do  so,  is  as  if  a  State  should 
provide  an  agricultural  department,  put  a  super- 
intendent of  agriculture  in  charge  to  look  speci- 
ally after  the  interests  of  the  farmer  and  then  com- 


73 

pel  him  (the  superintendent)  to  assess  the  farmers 
as  a  class,  in  addition  to  their  regular  taxes,  an 
amount  equal  to  about  one-fifth  of  all  the  net 
profits  of  agriculture. 

It  has  been  stated  by  an  eminent  actuary  ''  that 
the  money  taken  out  of  the  pockets  of  the  people 
by  the  taxation  on  life  insurance  companies, 
would  pay  the  annual  premiums  on  about 
$75,000,000  of  life  insurance.  It  would  pay  the 
cost  of  75,000  additional  policies  of  $1,000  each. 
It  would  increase  the  cash  dividends  paid  to  policy- 
holders about  25  per  cent." 

State  supervision  in  many  of  the  States  is  no 
longer  carried  on  for  the  welfare  and  protection  of 
the  insurance  interests  of  the  people,  but  it  is  de- 
generating into  a  position  to  collect  fees  and  taxes 
to  replenish  the  State  treasury,  or  as  an  honored 
member  of  your  association  told  me  in  confidence  : 
'^  1  am  now  but  little  more  than  a  public  collec- 
tor to  gather  from  the  insurance  companies  as 
many  shekels  as  possible  to  dump  into  the  treas- 
ury to  help  pay  the  ordinary  expenses  of  the 
State." 

I  have  suggested  to  our  actuary,  in  making  up 
the  dividends  in  the  future,  that  he  makes  a  sepa- 
rate statement,  showing  what  the  increased  divi- 
dends would  be  to  each  policy  were  it  not  for  the 
excessive  and  most  grossly  unjust  taxes  and  fees 


74 

imposed  by  the  various  States  on  the  funds  of  the 
policy-holders. 

It  is  no  fault  of  Commissioner  Matthews,  I  am 
sure,  but  in  tlie  great  State  of  Ohio,  the  money  of 
these  policy-holders  is  legally  stolen  and  used  not 
only  to  pay  the  expenses  of  the  various  other  State 
departments,  but  there  is  a  specific  portion  set 
apart  every  year  to  aid  in  supporting  the  tire  de- 
partment of  the  city  of  Cincinnati.  What  con- 
nection there  is  between  a  fund  set  apart  for 
widows  and  orphans,  and  the  fire  department  of 
Cincinnati,  no  one  but  a  •'  statesman  "  of  long  ex- 
perience can  tell. 

Unfortunately  for  me,  our  host,  and  the  manager 
of  this  great  entertainment,  in  giving  as  my  theme 
**  Life  Insurance  in  its  Relations  to  the  Public," 
gave  me  no  outline  as  to  the  treatment  he  wished 
me  to  give  this  broad  subject.  I  take  it  that  the 
various  modes  of  treating  it  are  about  as  many  as 
the  different  views  of  the  presidents  of  the  life 
insurance  companies  as  to  how  to  superintend  and 
govern  their  companies  ;  or  probably  as  numerous 
as  the  plans  and  the  ideas  of  insurance  commis- 
sioners as  to  the  model  way  of  managing  a  State 
insurance  department,  so  that  the  politicians  and 
the  Governor  of  the  State  will  be  pleased  ;  that  the 
assessment  companies  shall  be  treated  in  a  manner 
that  will  not  seriously  interfere  with  the  party  vote 


75 

at  the  next  election  ;  that  some  public  demonstra- 
tion shall  be  made  in  the  courts  or  the  press 
against  some  supposed  attempted  wrong  by  one  or 
two  of  the  large  life  insurance  companies,  in 
order  to  demonstrate  to  the  dear  people  that  their 
interests  alone  are  being  looked  after ;  that  the  last 
farthing  of  tax  and  fees  may  be  collected  from  all 
of  the  so-called  old  line  companies ;  that  the 
business  of  the  department  will  be  conducted  so  as 
merit  the  respect  of  the  managers  in  charge  of  the 
home  offices  of  the  various  companies ;  and,  in 
brief,  to  do  all  the  various  acts  and  duties  of  this 
much-abused  officer,  so  that  he  can  have  some  little 
self-respect  when  he  leaves  the  public  service,  and 
if  possible,  be  able  to  make  in  his  own  mind,  some 
little  excuse  for  the  few  glaring  abuses  of  trust 
that  he  has  found  but  dared  not  expose. 

At  no  other  time  in  the  history  of  life  insurance, 
have  its  relations  to  the  public  been  of  such  great, 
almost  universal  importance  as  they  are  at  the 
present  time,  and  it  is  difficult  for  us  who  are  busy 
in  thinking  and  planning  to  get  new  policy-holders 
to  enjoy  its  benelits,  to  realize  in  the  fullest  sense 
the  extent  to  which  the  public  at  large  is  affected 
by  the  results  of  this  great  scheme  of  beneficence. 
We  make  addresses,  we  issue  statements  showing 
that  the  life  insurance  companies  of  the  United 
States  alone  are  distributing  to  the  widows   and 


76 

orphan  children,  to  the  estates  of  holders  of  pol- 
icies and  to  the  policy-holders  themselves,  the  sum 
of  about  $150,000,000  per  annum.  The  people  hear 
and  read,  but  do  not  realize  the  magnificent  results, 
nor  fully  appreciate  the  ability  exercised  by  the 
trustees  of  these  great  corporations  ;  or  the  hardest 
kind  of  hard  work  required  of  the  agents  ;  or  the 
great  value  of  the  State  supervision  of  the  various 
States.  Had  such  a  result  been  predicted  one  hun- 
dred years  ago  or  even  fifty  years  ago,  it  would 
have  been  laughed  at ;  and  had  it  been  prophesied 
to  have  been  even  possible  in  any  other  country, 
or  in  any  other  century  of  th«  world' s  history,  it 
would  have  been  considered  a  tale  of  the  fairies. 
Yet  in  this  age,  in  this  country,  and  at  this  par- 
ticular time,  the  results  are  taken  as  a  matter  of 
course.  The  intelligent  business  man  reads  the 
facts  in  regard  to  the  many  millions  paid  out  by 
the  various  life  insurance  companies  last  year, 
and  says,  *'That  is  all  right;  that  is  what  these 
life  insurance  companies  were  organized  for." 
Then  he  wants  to  drop  the  subject,  rings  up  his 
fire  insurance  broker  to  cover  over  night  $50,000 
worth  of  merchandise  which  he  has  just  received, 
for  fear  that  a  fire  might  occur,  but  says  to  the 
gentlemanly  life  insurance  solicitor  that  he  is  very 
busy,  but  that  if  he  will  return  in  two  or  three 
months,  he  will  give  him  a  few  minutes  to  explain 


77 

the  special  features  of  the  new  policy  issued  by  his 
company  ;  but  assures  him  that  he  does  not  want 
any  additional  life  insurance.  The  same  man, 
however,  during  the  panic  of  1893,  would  look 
over  his  assets  several  times  every  month,  possibly 
several  times  a  day,  and  while  he  would  put  an  inter- 
rogation point  on  the  face  of  every  certificate  of 
stock  he  owned,  not  knowing  what  its  value  might 
be  on  the  morrow,  or  when  the  panic  was  over, 
when  he  came  to  his  policy  of  life  insurance, 
which  some  conscientious  and  persistent  friend 
had  virtually  forced  upon  him,  and  which  called 
for  850,000,  payable  to  Mary  and  the  children,  he 
realized  that  it  is  a  bond  good  for  its  full  face  value 
of  $50,000  ;  yes,  it  is  all  right,  it  is  in  a  regular  com- 
pany— no  need  of  any  interrogation  point  on  that. 
He  puts  it  away  by  itself,  and  when  on  the  train  or 
at  home,  or  when  he  awakens  from  a  troubled 
sleep,  he  thinks  of  the  $50,000  policy ;  he  knows 
it  is  absolutely  good,  never  a  doubt  about  it ;  he 
knows  that  if  anything  happens  to  him  or  his  great 
business,  Mary  and  the  little  ones,  for  whom  he 
has  spent  his  life,  will  be  in  a  position  of  comfort, 
and  with  a  smile  he  sleeps.  And  through  all  the 
days  of  that  troublesome  period,  with  this  thought 
in  his  mind,  he  bravely  fights  the  battle  through. 
For  more  than  half  a  century  the  people  of  the 
United   States  have  come  to  look  upon    fire  and 


78 

marine  insurance  as  so  essentially  a  necessary  ad- 
junct to  the  successful  carrying  on  of  commerce, 
that  without  them  the  merchant  could  not  carry 
on  at  all  his  business  involving  immense  credits. 
They  are  taken  simply  as  a  matter  of  course,  and 
the  business  and  commercial  interests  of  the 
country  take  them  as  a  matter  of  course  fully  as 
much  as  a  farmer  takes  the  sunshine  and  rain ; 
without  them  the  farmer  would  not  sow  because  he 
would  not  expect  to  reap.  Without  the  protection 
and  security  of  fire  and  marine  insurance  the 
business  man  would  not  buy  and  therefore  could 
not  sell.  The  farmer,  however,  does  sometimes 
stop  and  return  thanks  to  the  All- Wise  Providence 
for  sending  the  rains  in  season  and  the  life-giving 
sunshine,  but  the  business  man  rarely,  if  ever, 
stops  to  think  of  the  care  of  the  large  fire  and 
marine  insurance  companies,  without  which  his 
vocation  would  be  gone. 

Life  insurance  in  its  relations  to  the  people  is 
different  from  fire  and  marine  insurance.  These 
two  branches  of  insurance  are  of  the  utmost  im- 
portance to  the  business  man  in  carrying  on  his 
business,  principally  from  a  mercantile  standpoint ; 
but  life  insurance  is  broader.  Its  results,  too, 
affect  the  business  man,  and  I  am  glad  to  say  that 
the  day  has  already  come  when  a  business  man 
who  is  physically  able  and  does  not  carry  a  respec- 


79 

table  amount  of  life  insurance,  is  looked  upon  as 
a  man  wanting  in  good  business  judgment ;  and 
the  time  will  come  when  business  men  will  be  wise 
enough,  not  only  to  provide  for  their  families  in 
case  of  early  decease,  by  carrying  an  amount  of 
life  insurance,  the  income  of  which  will  keep  their 
families  at  least  comfortable,  but  also  they  will 
provide  against  their  own  possible  business  failure 
by  taking  large  endowments  payable  at  the  age 
of  sixty  or  sixty-five,  so  that  in  case  they  have 
made  a  failure  in  life,  as  according  to  the  statistics 
95  out  of  every  100  do,  they  will  by  this  means 
alone  have  made  themselves  sure  to  be  of  the  ^ve 
that  succeed. 

But  life  insurance,  as  I  have  said,  is  broader 
than  fire  and  marine  insurance,  for  it  is  not  only 
for  the  business  man,  but  it  is  equally  beneficial 
and  even  more  necessary  for  the  minister,  the  law- 
yer, the  physician,  every  kind  of  professional  men, 
the  farmer,  the  merchant,  the  mechanic,  the  day 
laborer  and  all  classes,  all  vocations  are  recipients 
of  its  bountiful  results. 

The  young  man  who  now  starts  in  life  with  an 
ambition  to  have  an  estate  of  from  $1,000  to  $5,000, 
which  he  can  only  expect  to  accomplish  by  the 
strictest  economy  and  the  hope  of  living  fifteen, 
twenty  or  twenty-five  years,  can  now  get  a  bond 
calling  for  this  sum,  and  in  case  of  death  the  con- 


80 

templated  work  of  a  lifetime  is  realized  ;  or  by  an 
endowment,  he  can  have  the  result  in  case  of 
death  and  the  positive  sum  at  the  end  of  the  en- 
dowment period. 

The  merchant  can  make  his  business  ventures,  as 
most  merchants  to  a  greater  or  less  extent  must  do, 
if  he  can  feel  that  in  case  he  fails  and  death  should 
occur  before  he  recovers  from  his  business  losses, 
his  family  will  have  the  income  of  the  $100,000 
provision  of  life  insurance.  The  professional  man 
instead  of  worrying  over  his  inability  to  lay  up  a 
small  fortune,  can  insure  his  life  for  the  amount 
that  he  would  expect  to  save  by  a  whole  lifetime 
of  economy,  and  with  a  bond  for  this  amount,  he 
can  devote  his  energies  to  the  ambition  of  his  life 
in  becoming  eminent  in  his  chosen  profession. 
What  is  true  of  the  professional  man,  is  also  true 
of  every  other  class,  and  thus  all  these  men  are  not 
only  made  surer  and  safer,  but  they  are  able  to 
accomplish  the  greatest  possible  results.  In  the 
language  of  a  very  eminent  actuary,  "life  insur- 
ance is  a  scheme  which  enables  every  provident 
man  to  apply  the  truest  and  loftiest  principles  of 
practical  benevolence  in  his  own  home.  It  is  the 
close  friend  of  honesty,  sobriety,  economy  and  per- 
sistent toil.  It  is  the  bitter  and  implacable  enemy 
of  improvidence,  dishonesty,  ignorance,  selfishness 
and  vice." 


81 

Life  insurance  not  only  includes  the  interests  of 
mankind  from  a  commercial  and  financial  point  of 
view,  but  it  does  more  ;  it  includes  the  moral,  the 
intellectual  advancement  of  the  race.  The  close 
student  of  political  economy  of  the  twentieth  cen- 
tury is  wanting  in  acumen  if  he  fails  to  include  the 
results  of  life  insurance  as  one  of  the  greatest  of 
factors  in  determining  the  prosperity,  the  happi- 
ness, the  welfare  and  the  still  greater  advancement 
in  civilization  of  the  peoples  of  the  world,  and 
especially  those  of  our  own  beloved  America.  It 
may  be  difficult  to  measure  the  effect  of  life 
insurance  on  some  countries,  because  the  imme- 
diate results  are  themselves  not  yet  of  any  great 
magnitude  ;  but  in  our  own  country  every  student 
and  thinker  of  average  intelligence  must  recognize 
the  very  important  part  that  life  insurance  bears 
among  the  great  agencies  at  work  moulding  the 
destiny  of  the  nation. 

It  may  be  difficult  to  estimate  the  full  effects  on 
the  moral  and  intellectual  condition  of  the  people 
resulting  froni  the  benefits  of  Life  Insurance.  No 
one  knows  how  many  women  and  children  are  saved 
by  it  from  the  toils  and  temptations  and  oft  times 
degradation  of  sudden  and  unexpected  poverty. 
No  one  can  fully  estimate  the  comforts  of  the 
widows  and  families,  the  educational  advantages 
given  to  hundreds  of  thousands  of  children,  which 


otherwise  might  have  grown  up  in  ignorance  with 
its  possibly  accompanying  horrors  of  vice  and  im- 
morality, and  no  one  would  attempt  to  measure 
the  increased  energies,  the  brightening  hopes,  the 
quieter  joys  and  peace  of  mind,  the  solace  of  the 
sick,  and  even  the  lives  lengthened,  the  millions  of 
husbands  and  fathers  made  braver,  more  courage- 
ous and  truer,  the  millions  of  wives  and  mothers 
happier  and  more  contented  because  of  the  knowl- 
edge that  the  strong  arms  of  life  insurance  were 
around  and  about  them,  to  cheer,  tq  encourage  and 
strengthen  them  in  performing  the  manifold  duties 
of  their  lives.  We  can,  however,  with  a  little 
thought,  have  some  conception  of  the  influence  of 
life  insurance  on  the  commercial  and  financial  pros- 
perity of  the  country,  of  the  quiet  but  more  sub- 
stantial strength  that  is  given,  and  the  still  greater 
strength  and  security  that  may  and  will  be  given 
by  it  to  the  money  affairs  of  the  United  States. 

Financiers  and  statesmen  have  for  years  taken 
the  aggregated  millions  and  the  balancing  power 
that  life  insurance  companies  have  given  to  the 
finances  of  the  country,  simply  as  a  matter  of 
course,  without  stopping  to  realize  their  silent 
power  and  importance.  Statesmen  and  so-called 
financiers  look  with  wonder  on  the  results  of  laid 
plans,  and  wait  to  know  the  opinions  and  schemes 
of  a  coterie  of  men  located  in  the  Wall  streets  of 


83 

the  few  great  business  centers,  because  of  the  large 
accumulations  of  capital  they  can  temporarily  con- 
trol for  the  weal  or  the  woe  of  the  people,  ^the  one 
or  the  other  depending  upon  their  judgment, 
whether  it  proves  to  be  good  or  bad. 

Granting  that  these  great  financiers  have  only 
the  good  of  all  the  people  at  heart,  and^that  they 
are  always  not  only  able  but  honest  in  their  de- 
sires to  plan  for  the  nation's  financial  prosperity 
and  not  for  any  particular  section  of  it,  nor  for 
any  special  class  of  individuals,  I  am  willing  to 
give  them  all  the  praise  and  gratitude  their  warmest 
and  most  devoted  admirers  can  bestow  ;  and  yet,  we 
all  know,  with  one  little  cry  of  a  possible  panic, 
their  schemes  come  to  naught,  and  much  of  their 
billions  of  other  people's  money  is  taJien  by  the 
owners,  drawn  out  by  the  depositors,  and  what  is 
left  of  these  immense  accumulations  of  capital  is 
placed  behind  bars  with  the  time  locks  and  com- 
binations protected  by  clearing  house  certificates. 

I  do  not  wish  to  cast  the  least  reflection  on  the 
bankers  and  great  financiers  of  this  country. 
They  have  done  their  part  from  their  standpoint 
better,  doubtless,  than  some  of  us  have  done  ours, 
and  instead  of  being  criticised,  as  is  so  often  done, 
they  should  be  praised  for  everything  they  have 
earnestly  and  honestly  done  to  improve  and 
strengthen  the  finances  of  the  nation. 


84 

I  do  not  wish  to  detract  from  the  honor  that  is 
so  justly  due  to  the  bankers  and  financiers,  nor 
of  the  very  necessary  and  important  part  the 
banking  interest  and  many  other  moneyed  in- 
terests perform  in  the  increased  prosperity  of  our 
country.  What  I  wish  to  try  to  do,  is  to  point 
out  and  make  prominent  the  fact  that  the  accu- 
mulated millions  of  money  in  the  control  of  the 
officers  and  directors  of  life  insurance  com- 
panies are  a  most  important  factor,  and  in  my 
opinion  the  most  important  factor,  in  the  solidity 
and  security  of  the  present  or  any  other  financial 
system  our  country  may  adopt.  The  accumula- 
tions of  life  insurance  cannot  be  placed  behind 
iron  bars ;  they  cannot  be '  withdrawn,  except  to 
the  extent  that  some  companies,  most  of  them, 
as  I  am  informed,  against  the  better  judgment  of 
their  officers,  have  permitted  that  only  element 
of  possible  danger  called  *'cash  surrender  values" 
to  be  injected  into  their  contracts.  You  will  pardon 
me  for  expressing  myself  strongly  on  this  subject, 
but  I  know  you  will  give  me  credit  for  being  honest 
and  sincere  when  I  say  that  the  cash  surrender 
value,  in  all  policies,  is  nothing  but  a  chromo  of 
the  cheapest  kind,  and  if  placed  in  policies  so 
that  it  can  be  taken  advantage  of  at  any  time, 
then  a  scandal  in  any  company,  however  un- 
founded,   might   precipitate  a  run  on    the  com- 


85 

pany,  which  would  be  like  the  run  on  a  bank. 
The  company  and  bank  might  be  solvent,  but 
when  its  doors  are  once  closed,  they  are  closed 
forever,  the  bank  is  a  wreck  and  so  most  likely 
would  be  the  insurance  company.  A  life  insur- 
ance company  is  not  a  savings  society.  It  is  better 
and  broader  ;  it  has  a  different  mission  to  perform 
and  a  cash  surrender  even  up  to  the  full  reserve 
is  not  the  full  value  of  a  life  insurance  pglicy  to 
the  old  holder,  much  less  is  it  the  full  value  to 
the  wife  and  children. 

Let  the  companies  all  adopt  the  Ohio  law  if  they 
wish,  so  that  they  can  aid  or  assist  their  policy- 
holders to  keep  their  policies  in  full  force  until  ma- 
turity by  death  or  endowment,  for  in  no  other  way 
can  the  officers  and  trustees  of  a  life  insurance 
company  do  their  whole  duty,  in  my  opinion,  to 
their  policy-holders  ;  but  do  not  make  any  special 
inducements  or  offer  any  gold-washed  chromos  for 
them  to  surrender  them,  and  I  sincerely  hope  that 
if  any  of  you,  commissioners,  represent  a  State  that 
has  such  a  law  as  a  part  of  the  statutes  of  your 
State,  that  in  the  truest  and  best  interests  of  true  life 
insurance  you  will  do  everything  in  your  power  to 
have  this  one  element  of  possible  danger  eliminated. 
The  accumulations  of  life  insurance  cannot  and 
should  not  be  used  to  further  or  promote  improper 
financial  schemes  ;  their  bank  cannot  suspend. 


Some  very  good  financiers  have  suggested  that 
the  banking  system  of  the  United  States  should  be 
so  changed  that  there  might  be  a  branch  bank  of 
some  greater  bank,  and  the  branch  bank  located  in 
any  center  needing  its  facilities  or  the  use  of  its 
issued  currency.  It  is  possible  that  the  laws  of 
some  of  the  States  might  need  some  amendments, 
but  with  those  amendments,  the  life  insurance 
companies  could  have  any  sum  from  $100,000  to 
$100,000,000  to  loan  to  good  borrowers  on  approved 
security  in  any  needed  locality  or  business  center, 
and  it  would  not  be  currency  issued  on  the  faith  of 
certain  deposits  of  questionable  or  even  the  best  of 
securities,  but  it  would  be  real  money,  if  you  will  ex- 
cuse the  word,  and  the  borrower  can  have  it  not  only 
for  thirty,  sixty  or  ninety  days,  but  for  a  period 
long  enough  for  him  to  adjust  his  affairs,  save  his 
business  from  ruin  and  himself  from  bankruptcy. 

Did  any  of  you  ever  stop  to  realize  what  a  great 
conserver  the  life  insurance  companies  of  the 
United  States  are,  of  the  finances  of  the  country  ? 

Did  it  ever  occur  to  you  that  the  life  companies 
alone  could  have  loaned  the  United  States  the  whole 
of  the  $500,000,000  asked  for  to  carry  on  the  war 
with  Spain — that  they  could  have  made  this  loan 
on  bonds  payable  at  any  day,  at  the  pleasure  of  the 
Government  ?  Is  it  not  a  matter  of  pride  that  four 
of  these  companies  alone  could  render  the  United 


87 

States  any  temporary  assistance  it  might  need  in 
carrying  on  any  war  or  in  any  other  manner  in  con- 
ducting the  affairs  of  the  country  in  case  of  an  emer- 
gency ?  With  the  assistance  of  ail  the  life  com- 
panies, the  United  States  Treasury  could  so  conduct 
its  affairs  that  all  the  other  moneyed  institutions 
of  the  country  combined  could  not  affect  its  credit. 
Life  insurance  as  a  business  is  the  greatest  in 
this  or  any  other  country  and  its  success  during 
the  last  quarter  of  a  century  is  without  a  parallel. 
The  integrity  of  the  officers  and  directors  of  these 
great  organizations,  and  the  ability  they  have  dis- 
played, cannot  but  receive,  as  they  most  justly 
merit,  the  gratitude  of  their  patrons  and  the  ad- 
miration of  the  business  world,  but  the  greatest 
honor  is  due  to  the  honest  and  conscientious  repre- 
sentatives in  the  field  of  the  various  companies  ; 
they  are  the  ones  to  whom  is  due  the  greatest 
credit.  They  have  done  a  work  second  in  its 
greatest  results  to  but  one  other ;  they  are  the 
ones  who  have  carried  the  bricks  for  the  erection 
of  this  wonderful  and  most  magnificent  structure  ; 
such  a  structure  that  the  relations  of  life  insurance 
to  the  public  to-day  are  so  varied  and  important, 
that  what  I  have  tried  to  say  to  you  on  this  subject 
is  but  a  minimum  of  what  might  be  said,  and  if  it 
has  given  you  even  a  glimpse  of  the  beauties  of  the 
inner  temple,  I  shall  be  glad  and  truly  grateful. 


GENERAL    PLANS,    RESERVES    AND 
INVESTMENTS. 


EMORY  McCLINTOCK  : 

MY  subject  is  at  once  broad  and  narrow.  It  em- 
braces tlie  whole  field  of  life  insurance,  and 
yet  that  field  has  been  largely  apportioned  to  other 
speakers.  For  example,  a  life  company  has  its  rela- 
tions to  the  State,  and  the  consideration  of  these  re- 
lations has  been  intrusted  to  others.  In  the  same  way 
I  am  relieved  from  discussing  another  important 
class  of  practical  maxims  and  principles  which  re- 
late to  what  is  called  moral  hazard  in  the  selection 
of  risks.  The  insurance  of  lives  for  small  sums  has, 
under  the  name  of  industrial  insurance,  become  a 
specialty  of  immense  importance,  which  here  and 
now  receives  due  recognition,  and  with  which  I  am 
therefore  not  concerned.  It  is  impossible  to  speak 
of  the  nature  and  necessity  of  ''reserves"  with- 
out having  much  to  say  concerning  the  assessment 
system,  which  is  itself  one  of  the  ''  general  plans  " 
under  which   the  business   of    life    insurance  is 


89 

prosecuted  ;  yet  on  this  subject  again  I  am  con- 
fined to  generalities,  because  the  pitfalls  of  this 
system,  and  the  possible  means  of  escaping  them, 
are  assigned  for  special  and  detailed  discussion 
by  others.  As  regards  the  customary  methods  of 
life  insurance  companies,  my  province  relates  to 
those  essential  points  in  which  they  all  necessarily 
agree,  while  the  peculiar  features  wherein  they 
vary  will  be  discussed  by  the  speaker  who  suc- 
ceeds me.  Concerning  "investments,"  a  broad 
subject  which  I  have  no  time  to  discuss  at  large, 
I  shall  consider  only  those  points  in  which  the 
investments  of  a  life  company  may  differ  from 
those  of  an  individual,  a  trustee,  or  a  savings 
bank.  "  Investments  "  form  part  of  my  subject 
obviously  because  the  reserve  fund  needs  to  be 
invested.  My  most  important  topic  is  the  nature 
and  necessity  of  a  reserve  fund,  and  as  this  fund 
may  be  invested  on  principles  somewhat  different 
from  those  which  guide  ordinary  investors,  we 
have  occasion  to  note  the  points  of  difference.  It 
is  convenient  for  me  to  take  this  topic  up  first. 

INVESTMENTS. 

As  compared  with  individual  investors,  the  trus- 
tee, the  savings  bank  and  the  life  company  are  alike 
in  being  confined  to  investments  entirely  safe.  The 
private  investor  can  take  speculative  risks  and  if 


90 

he  exercises  good  judgment  can  secure  thereby  a 
greater  average  income.  The  trustee,  the  savings 
bank,  and  the  life  company  are  debarred  from  taking 
chances,  and  must  be  content  with  such  rates  of  in- 
terest as  can  be  obtained  upon  investments  of  re- 
cognized security.  Of  these  three  classes,  the  trus- 
tee is  usually  most  restricted,  for  he  is  compelled 
to  adapt  the  investment  of  every  sum  in  accordance 
with  the  particular  trust  for  the  purposes  of  which 
that  sum  has  been  placed  in  his  hands.  As  a  rule, 
the  trust  is  liable  to  be  changed  or  ended  with  little 
or  no  notice,  so  that  in  most  cases  the  trustee  en- 
deavors to  find  investments  which  may  on  short  no- 
tice be  subdivided  or  converted  into  cash.  The  sav- 
ings bank  is  never  certain  that  it  may  not  become 
liable  to  a  heavy  run,  and  must  shape  its  invest- 
ments accordingly.  The  life  company  is  under  no 
such  restriction  in  respect  to  time  or  to  the  danger 
of  a  sudden  call.  It  has  this  advantage  over  every 
other  investor,  that  so  long  as  it  continues  to  pros- 
per it  can  afford  to  make  investments  for  long  terms, 
and,  since  it  holds  no  deposits,  and  is  therefore  not 
liable  to  a  run,  does  not  need  to  hold  any  great  pro- 
portion of  its  assets  in  ready  cash  or  in  immediately 
convertible  securities.  Its  annual  income  covers  its 
disbursements.  It  is,  however,  desirable  for  a  cer- 
tain reason  to  hold  a  considerable  sum  in  bank  or 
in  the  form  of  securities  immediately  available. 


91 

This  reason  is  that  opportunities  arise  from  time  to 
time  for  the  favorable  investment  of  large  sums, 
and  in  order  to  take  advantage  of  such  opportunities 
a  company  must  either  have  the  cash  in  hand  or 
the  means  of  obtaining  it  at  once  without  borrow- 
ing. Two  forms  of  investment  are  recognized  as 
especially  suitable  :  mortgages,  and  municipal  or 
corporate  bonds.  A  life  company  having  large  sums 
at  its  disposal  can  purchase  good  bonds  in  large 
quantities  on  the  best  terms,  and  can  either  hold 
them  till  maturity,  or  dispose  of  them  subsequently 
at  a  profit.  In  this  course  there  is  no  element  of 
hazard,  for  a  permanent  institution  like  the  life 
company  is  never  compelled  to  sell  at  a  loss,  but 
can  always  hold  its  good  bonds,  if  necessary,  until 
they  are  paid  at  maturity. 

WHAT   IS   ESSENTIAL  ? 

No  life  insurance  organization  has  ever  yet 
wound  up  its  business  successfully.  I  do  not  refer 
to  reinsurance  or  amalgamation,  but  to  that  blessed 
ending,  not  wholly  impossible,  which  is  contem- 
plated by  theorists  when  they  say  that  a  life  com- 
pany can  go  on  without  new  business  and  gradually 
wind  up  its  affairs  by  maintaining  a  reserve  suf- 
ficient to  pay  every  claim  up  to  the  end.  In  reality 
life  insurance  organizations  either  succeed  or  fail, 
and  permanent  success  depends  upon  the  permanent 


92 

prevention  of  failure.  A  life  company  is  not  suc- 
cessful unless  it  is  able  to  go  on  successfully  through- 
out all  time.  What,  then,  are  the  essential  plans 
and  principles  which  must  be  followed  by  any  life 
insurance  organization  aiming  to  endure  through- 
out the  future  ?  It  must  be  well  managed,  of  course, 
energetically  and  prudently,  but  there  are  certain 
points  and  maxims  peculiar  to  this  business,  de- 
veloped by  experience,  and  these  are  what  we  have 
now  to  consider. 

PLANS  MUST  BE  ATTRACTIVE. 

First,  your  plans  must  be  attractive  to  the  pub- 
lic. Without  this  nothing  can  be  done,  for  your 
first  need  is  to  be  able  to  secure  new  risks  without 
undue  cost.  I  do  not  dwell  on  this  point,  because 
it  speaks  for  itself,  and  will  only  call  your  at- 
tention to  one  or  two  illustrations.  It  is  usually 
supposed  that  the  co-operative  plan  is  attractive 
but  not  secure,  and  that,  notwithstanding  its  at- 
tractiveness, it  fails  because  it  is  not  secure.  In 
reality  the  co-operative  plan  is  secure  but  not  at- 
tractive and  in  spite  of  its  security  it  fails  because 
it  is  not  attractive.  By  a  co-operative  society  I 
mean  one  which  promises  to  pay  in  case  of  death 
such  sums  as  it  may  actually  collect.  This  plan  is 
unquestionably  secure,  because  it  is  impossible  for 
such  a  society  to  fail  to  meet  its  engagements.     It 


93 

is  true  that  the  engagements  are  not  burdensome, 
but  such  as  they  are,  the  society  can  always  carry 
them  out.  Of  all  known  business  organizations, 
the  co-operative  society  alone  is  always  certain  to 
be  able  to  meet  its  legal  liabilities.  It  can  never 
be  broken  up  by  legal  process,  assuming  its  affairs 
to  be  managed  without  embezzlement.  Neverthe- 
less, in  spite  of  their  legal  security,  these  conserva- 
tive organizations  do  regularly  and  speedily  come 
to  an  end  because  they  fail  to  attract  new  risks. 
The  plan  which  is  attractive  when  the  society  is 
organized,  and  when  deaths  are  comparatively  few 
because  the  risks  have  recently  been  scrutinized 
and  none  but  good  ones  accepted,  becomes  any- 
thing but  attractive,  is  indeed  positively  repugnant, 
when  in  the  course  of  time  the  deaths  become  more 
frequent,  and  the  assessments  more  frequent.  It  is 
true  that  the  old  members  who  are  still  in  good 
health  become  tired  of  increasing  payments  and 
that  a  large  proportion  of  them  discontinue  their 
membership  before  many  years,  but  if  their  places 
could  be  supplied  by  new  risks  in  large  numbers 
without  much  trouble  or  expense  the  co-operative 
society  could  go  on  forever.  The  precise  point 
wherein  the  plan  necessarily  fails  is  that  after  a 
few  years  the  cost  to  new  members  is  so  great  as  to 
make  it  difficult  to  secure  new  members  in  suf- 
ficient numbers.     If  a  man  thinks  of  joining  an  as- 


94 

sessment  society  he  will  join  one  newly  organized, 
in  which  the  assessments  are  still  few,  rather  than 
an  older  one  in  which  the  cost  is  notoriously 
greater. 

I  have  said  that  the  first  principle  of  life  insur- 
ance practice  is  to  make  your  plans  attractive. 
One  plan  which  is  not  attractive  to  the  public  is 
nevertheless  apt  to  strike  the  fancy  of  those  who 
seriously  and  honestly  endeavor  to  avoid  the 
necessity  of  a  reserve.  It  requires  the  collection 
of  a  premium  each  year  from  each  member  exactly 
sufficient  to  pay  the  cost  of  his  current  insurance. 
This  is  known  as  the  natural  premium  plan.  It 
commends  itself  by  one  reasonable  consideration 
which  every  one  admits  and  yet  which  few  seem 
willing  to  follow  in  practice,  that  a  man  ought  to 
be  just  as  willing  to  pay  the  current  cost  of  his  life 
insurance  as  a  natural  part  of  his  current  expenses, 
and  without  looking  for  any  return  in  case  he  does 
not  die,  as  to  pay  the  cost  of  insuring  his  dwelling 
without  looking  for  any  return.  You  may  take  it 
as  a  fact  of  experience,  as  a  principle  of  human 
nature  established  beyond  controversy,  that  the 
average  man  will  not  insure  his  life  knowingly  on 
that  seemingly  reasonable  system  which  requires 
cash  payments  increasing  from  the  beginning 
throughout  life.  It  is  true  that  societies  nominally 
working  on  this  principle  are  able  to  attract  new 


95 

risks,  but  in  almost  every  case  you  will  also  find 
that  in  reality  the  payment  does  not  increase 
much,  if  at  all,  while  this  process  of  attracting  new 
risks  is  goin^  on,  and  that  the  members  expect 
that  their  payments  will  be  kept  down  by  divi- 
dends for  a  long  period  in  the  future,  or  perhaps 
permanently,  because  they  see  them  kept  down  in 
the  case  of  policies  taken  out  heretofore.  My  point 
is  that  the  natural  premium  societies  in  which  the 
payments  actually  increase  every  year  from  the 
beginning  are  exceedingly  few  in  number  and  quite 
recently  established.  They  are  working  along 
faithfully  and  honestly  indeed,  but  against  increas- 
ing difficulties,  because  no  amount  of  argument 
can  make  their  plan  attractive  to  the  average  man. 
There  are  select  souls  here  and  there,  like  you  and 
me,  who  are  swayed  solely  by  reason  and  who  may 
be  induced  to  join  in  forming  a  society  of  this 
sort.  The  difficulty  is  that  in  this  commonplace 
world  of  ours  there  are  too  few  superior  beings 
like  you  and  me,  and  that  the  average  man  will 
have  nothing  to  do  with  the  natural  premium  sys- 
tem in  actual  practice,  with  his  annual  payments 
increasing  from  the  start.  If  you  take  the  trouble 
to  watch  the  progress  of  this  little  handful  of  soci- 
eties working  vigorously  on  that  system,  you  will 
find  one  after  the  other  giving  up  the  struggle. 
One  will  adopt  some  system  of  dividends  to  pre- 


96 

vent  the  payments  next  year  from  increasing  above 
what  they  are  this  year ;  another  will  change  its 
system  and  envelop  itself  in  an  atmosphere  of  re- 
serve ;  and  still  another  will  go  out  of  business 
altogether.  The  thing  will  not  work  and  cannot 
be  made  to  work. 

It  is  sometimes  supposed  that  the  natural  pre- 
mium system  is  sounder  than  the  system  of  assess- 
ment after  death  because  the  payments  are  made 
in  advance.  Assuming  the  assessments  after  death 
to  be  made  upon  an  equitable  system,  I  am  unable 
to  see  much  reason  for  this  widespread  opinion, 
though  of  course  it  is  better  to  collect  one  or  two 
assessments  in  advance.  All  plans  which  contem- 
plate only  current  payment  for  current  insurance, 
without  reserves,  are  essentially  the  same  in  prin- 
ciple and  open  to  the  same  objection.  There  is 
nothing  radically  unsound  about  the  assessment 
system  except  the  creation  of  dissatisfaction  by 
the  increase  of  payments,  and  except  also  the  ab- 
sence of  any  penalty  upon  discontinuance ;  and 
precisely  the  same  elements  of  unsoundness  are  to 
be  found  in  the  natural  premium  system. 

PAYMENTS   MUST   NOT   INCREASE. 

I  have  mentioned  as  an  element  of  unsoundness 
the  creation  of  dissatisfaction  by  the  increase  of 
payments. .  This  brings  me  to  the  second  of  the 


97 

principles  or  maxims  which  I  have  to  lay  before 
you  as  essential  to  all  sound  plans  of  life  insur- 
ance. You  must  not  only  avoid  dissatisfaction  in 
advance  by  making  your  plans  attractive,  but  you 
must  also  arrange  your  plans  so  that  they  shall  not 
create  serious  dissatisfaction  in  the  future  ;  and 
experience  shows  that  while  dissatisfaction  may 
arise  here  and  there  for  various  reasons,  there  is 
one  evil  which  may  be  relied  upon  invariably  to 
create  intense  dissatisfaction,  and  this  evil  is  the 
pressure  of  the  increase  of  cash  payments  with- 
out prospect  of  speedy  relief.  For  practical 
purposes,  this  second  maxim,  that  you  must 
guard  against  future  dissatisfaction,  may  be  con- 
densed and  embodied  in  this  simple  warning, 
that  your  plans  must  not  be  such  as  to  require 
from  the  policy-holder  at  any  future  time  a  perma- 
nent increase  in  cash  payments.  That  the  average 
man  cannot  be  persuaded  to  remain  in  a  society 
knowing  that  he  must  pay  more  next  year  than  he 
does  this  year,  and  that  his  payments  must  go  on 
increasing  thereafter  as  long  as  he  lives,  is  a  fact  of 
human  nature  as  it  exists  which  must  be  kept 
prominently  in  the  foreground  as  a  vital  practical 
fact,  I  might  say  as  one  of  the  most  important  of 
those  warning  beacons  which  are  or  ought  to  be 
familiar  to  every  navigator  on  the  sea  of  life  insur- 
ance.    It  is  already  generally  understood  that  new 


98 

members  are  not  easily  secured  if  there  is  a  clear 
agreement  for  immediately  increasing  payments. 
What  is  not  so  widely  known  is  that  the  same  in- 
tense dissatisfaction  is  produced  among  members 
already  insured,  if  and  when  their  time  comes  to 
experience  a  notable  increase  in  their  payments 
without  prospect  of  relief.  This  state  of  things  is 
so  well  settled  by  experience  that  it  may  be  ac- 
cepted as  a  solid  fact  of  human  nature.  I  do  not 
say  that  it  ought  to  be  so ;  I  agree  that  it  ought 
not  to  be  so  ;  I  only  say  that  it  is  so.  If  you  can- 
not educate  new  members,  in  the  first  flush  of 
their  zeal,  to  be  content  with  increasing  payments, 
how  can  you  expect  that  old  members,  who  have 
for  a  period  of  years  been  accustomed  to  making 
payments  practically  stationary  in  amount,  and 
who  have  hoped  that  no  increase  would  ever  occur, 
will  rest  content  when  the  increase  is  actually 
upon  them  ?  The  experience  of  every  assessment 
society  which  is  past  its  youth  proves  the  con- 
trary, and  1  may  add  that  a  like  experience  has 
attended  every  life  company  which  has  made  any 
long-continued  experiment  with  any  plan  involv- 
ing increase  of  payments.  The  old  premium  note 
system  in  this  country  was  a  reasonable  system  for 
any  one  who  understood  it,  but  as  the  notes  in- 
creased the  cash  payments  for  interest  also  in- 
creased, and  the  average  policy-holder  could  not 


99 

understand  it  and  would  not  put  up  with  it.  Until 
some  one  society  or  company  is  able  to  show  the 
working  of  increasing  payments,  without  hope  of 
relief,  and  without  serious  dissatisfaction  through- 
out a  period  of  years,  and  so  to  disprove  this  prin- 
ciple, we  must  continue  to  recognize  as  a  guiding 
maxim  that  human  nature  rebels  inevitably  against 
increasing  payments. 

It  may  naturally  be  asked,  what  particular  harm 
does  it  do  if  people  do  get  discontented  after  five  or 
ten  years  and  discontinue  their  contributions? 
Does  not  the  society  always  have  a  large  number 
of  risks  in  force  whose  period  of  discontent  has  not 
yet, come,  and  can  it  not  go  on  forever,  taking  in 
new  members  with  payments  practically  stationary 
for  a  term  of  years,  and  letting  them  go  when  the 
time  comes  for  the  increase  ?  These  questions  are 
reasonable  questions.  They  indicate  the  point  of 
view  of  men  who  have  given  considerable  thought 
to  the  subject,  and  who  honestly  object  to  the  ac- 
cumulation of  a  reserve  fund.  They  agree  that 
new  members  will  not  come  in  unless  their  pay- 
ments are  in  some  way  protected  from  increase  for 
a  considerable  period  after  entrance.  They  agree 
that  at  some  time  in  the  future  there  must  be  a  nec- 
essary increase,  and  that  the  average  man  will  dis- 
continue his  payments  in  consequence.  They  have 
now  and  then  heard  good  actuaries  say  that  their 


100 

companies  have  not  suffered  any  notable  increase 
in  the  proportion  of  mortality  by  reason  of  discon- 
tinuances. Granting  that  discontinuances  must  be 
numerous,  and  regretting  the  necessity  of  {perpet- 
ually recruiting  new  members  to  take  the  place  of 
those  dropping  out,  they  nevertheless  see  no  un- 
soundness in  the  situation,  and  no  reason  why  a 
society  working  on  that  system  should  not  go  on 
successfully  and  permanently.  To  discuss  this 
point  intelligently  and  satisfactorily,  it  is  neces- 
sary to  examine  with  some  care  the  effect  of  dis- 
continuances upon  the  average  quality  of  the  risks 
remaining. 

HOW  DISCONTINUANCES   AFFECT  DEATH   LOSS. 

If  you  ask  the  actuary  of  any  sound  and  popular 
life  company  whether  the  good  lives  have  dropped 
their  insurances  in  greater  proportion  than  the  im- 
paired lives,  his  answer  will  quite  probably  be 
*'No."  You  may  thus  obtain  unimpeachable  evi- 
dence that  various  companies  have  not  suffered 
appreciably  by  the  lapse  of  good  risks  in  undue 
proportion.  A  life  company  which  retains  its 
popularity  does  not,  in  fact,  usually  suffer  on  the 
score  of  vitality  by  reason  of  discontinuances.  It 
may  have  many  lapses  in  the  first  year  of  insur- 
ance, but  the  medical  examination  is  in  such  cases 
so  recent  that  the  risks  remaining  during  the  sec- 


101 

ond  year  are  on  the  whole  unusually  good,  and 
the  like  holds  true  until  the  fourth  or  fifth  year. 
After  the  third  year,  the  lapses  in  a  popular  life 
company  are  not  so  numerous,  and  those  which  do 
occur  may  be  traced  to  one  of  three  causes.  The 
first  cause  is  a  change  of  circumstances,  by  which 
the  policy-holder  finds  himself  unable  to  meet  his 
premium  payments.  It  is  believed  that  lapses  of 
this  class  occur  in  greater  proportion  among  those 
risks  which  have  become  deteriorated  in  health  or 
in  habits,  so  that  the  net  effect  of  such  lapses  is 
probably  favorable.  The  second  cause  is  that  the 
beneficiary  may  die  or  be  otherwise  provided  for, 
so  that  the  insurance  is  no  longer  needed.  Lapses 
from  this  cause  may  be  presumed  to  occur  in 
fairly  uniform  ratio  among  risks  of  all  grades, 
and  therefore  to  have  little  or  no  effect  upon  the 
quality  of  the  risks  remaining.  The  third  cause 
is  a  change  of  feeling  on  the  part  of  the  individual 
policy-holder,  notwithstanding  that  he  still  needs 
insurance  and  is  able  to  pay  for  it.  Although  the 
company  retains  its  general  popularity,  this  indi- 
vidual is  no  longer  satisfied.  Whether  the  fault 
is  his  own  or  that  of  the  agent  who  induced  him 
to  insure,  or  that  of  the  agent  of  some  other  com- 
pany who  dislikes  to  see  him  go  on  wasting  his 
money,  this  individual  is  dissatisfied  and  drops  his 
policy.     Since  lapses  of  this  class  occur  chiefly 


102 

during  the  first  two  or  three  years  of  insurance, 
this  cause  of  lapsing  in  popular  companies  is  a 
minor  one  after  three  years.  So  far  as  it  extends, 
however,  the  effect  of  it  must  be  injurious,  be- 
cause good  risks  become  effectively  dissatisfied 
much  more  easily  than  impaired  risks.  Taking 
all  three  causes  of  lapsing  together,  the  effect  of 
what  we  may  call  customary  or  normal  discontin- 
uances is  not  very  noticeable  one  way  or  the  other. 
After  the  fourth  year  of  insurance,  the  death 
losses  of  a  good  company  may  be  expected  to  range 
between  85  and  90  per  cent,  of  the  expected  loss 
according  to  the  American  Table  of  Mortality. 
How  is  it  now  with  the  assessment  society  or  the 
natural  premium  society?  Instead  of  the  small 
lapse  rate  after  five  years  which  is  found  in  the 
life  company,  which  becomes  still  smaller  as  years 
go  on  until  it  is  scarcely  perceptible,  the  assess- 
ment society  which  has  been  running  along  com- 
fortably for  a  number  of  years  finds  itself  all  of  a 
sudden  subjected  to  a  great  proportion  of  discon- 
tinuances, nearly  all  of  which  are  due  to  the  third 
cause  which  I  have  mentioned,  dissatisfaction.  I 
ought  to  add  that  the  assessment  society  is  all 
along  subject  to  depletion  in  consequence  of  the 
adverse  representations  of  agents  of  life  companies 
or  of  rival  societies.  These  representations  are 
most  effective  with  the  best  class  of  risks,  who  are 


103 

able  to  secure  insurance  elsewhere  and  to  pay  for 
it.  Whether  worked  upon  by  rival  agents  or 
actuated  merely  by  discontent  with  the  increase 
of  their  payments,  most  of  those  who  drop  out  of 
assessment  societies  do  so  while  still  in  good 
health,  thereby  increasing  the  proportion  of  im- 
paired risks  to  the  total  of  risks  remaining  in  force, 
and  the  effect  upon  the  average  vitality  of  the  risks 
remaining  is  damaging  and  before  long  disastrous. 
The  damage  wrought  by  this  kind  of  general  dis- 
satisfaction is  not  only  great,  but  cumulative. 
There  is  first  a  decrease  in  the  number  of  risks  in 
force,  and  then  there  is  a  greater  proportion  of 
mortality  among  those  risks  which  do  remain  in 
force,  that  is  to  say,  there  is  an  excessive  death 
loss.  This  increases  still  further  the  cost  of  insur- 
ance to  the  survivors,  and  this  again  increases  the 
dissatisfaction,  and  so  on,  each  form  of  evil  in- 
creasing the  other,  so  that  assessment  societies 
which  once  become  the  objects  of  general  dissatis- 
faction are  regarded  by  all  experts  as  doomed  to  a 
speedy  end. 

Just  here  I  wish  to  remark  that  in  speaking  of 
assessment  and  natural  premium  societies  I  leave 
out  of  consideration  those  mixed  forms  of  society 
which  have  some  other  bond  of  union  than  pure 
life  insurance.  When  there  is  no  such  other  bond 
of  union,  such  a  society  may  be  compared  with 


104 

the  work  of  a  party  of  children  on  the  beach,  who 
have  constructed  something  resembling  a  ship's 
cable  out  of  good,  hard,  moist  sand.     A  cable  of 
that  sort  is  as  sound  as  any  other  until  you  begin  to 
use  it.     But  if  these  children  have  put  a  core  in  the 
middle  of  their  rope  of  sand,  of  a  really  tough 
material,  such  as  a  strong  cord,  or  a  steel  chain, 
those  who  expect  the  structure  to  fall  to  pieces 
may  be  disappointed.     If  it  were  the  custom  of  the 
British  House  of  Lords  to  assess  themselves  when- 
ever a  death  occurred  among  their  number,  the 
House  of  Lords  would  still  hold  together  notwith- 
standing any  increase  of  assessments.     In  the  same 
way  it  is  quite  possible  for  a  professional  body,  a 
trades  union,   or  a  fraternal  society,  to  combine 
death  loss  assessments  with  other  elements  of  their 
constitution  in  so  small  a  proportion  that  the  dissat- 
isfaction over  assessments  is  counterbalanced  by  the 
cohesive  power  of  the  other  features  of  the  system. 
It  is  enough  to  say  that  death  loss  assessments  are 
an  element  of    weakness  wherever  they  appear, 
and  that  whether  this  element  of  weakness  is  coun- 
terbalanced by  other  elements  of  cohesiveness  and 
strength  disconnected  from  the  assessment  princi- 
ple is  a  question  to  be  decided  on  the  merits  of 
each  case  in  which  such  a  combination  appears. 
If  the  fraternal  element  is  strong  enough  to  carry 
the  assessment  element  on  its  back,  well  and  good. 


105 

Again  I  beg  you  to  observe  that  I  am  not  decrying 
assessment  societies  when  I  explain  their  acknowl- 
edged  deficiencies.     Their  central  idea  is  honest 
and  wholesome,  that  men  should  combine  to  bear 
one  another's  burdens.     The  benefits  of  the  system 
are  obvious  and  immediate,  while  its  evils  at  first 
appear  a  long  way  off.     It  is  true  that  the  benefits 
which  it  renders  to  those  who  die  early  may  be 
counterbalanced    eventually  by  the    betrayal    of 
those  who  are  no  longer  insurable  when  their  so- 
cieties go  to  pieces,  yet  those  benefits  have  been 
rendered  nevertheless,  and  rendered  mostly  to  the 
families  of  those  who  could  not  have  been  per- 
suaded to  insure  in  any  other  way.     Even  those 
who  are  finally  betrayed  have  mostly  no  right  to 
complain,  for  they  also   could  usually  not  have 
been  persuaded  to  take  the  benefit  of  a  sounder 
system.     If  it  be  said  that  the  assessment  system 
thrives  chiefly  among  the  ignorant  and  the  preju- 
diced, it  may  be  answered  that  no  system  can  be 
wholly  bad  which  persuades  the  ignorant  and  the 
prejudiced  to  insure  their  lives,  even  precariously 
and  for  a  short  time. 

The  acceleration  of  excessive  death  loss,  due  to 
widespread  dissatisfaction,  is,  of  course,  not  con- 
fined to  assessment  and  natural  premium  societies. 
Thirty  years  ago  there  were  many  small  and 
ephemeral  life  companies  which,  unless  they  were 


106 

wound  up  suddenly  on  technical  grounds,  showed 
towards  the  end  an  excess  of  death  losses  as  com- 
pared with  the  table  expectation,  this  greater  pro- 
portion of  loss  being  due  notoriously  to  the 
unwillingness  of  the  good  risks  to  go  on  paying 
premiums  after  impending  failure  came  into  view. 
Actual  experience  of  every  kind  concurs  to  show 
that  the  acknowledged  harmlessness  of  such  laps- 
ing as  occurs  in  popular  life  companies  affords  no 
real  basis  of  hope  to  the  managers  of  societies  in 
which  payments  must  increase  and  in  which  mem- 
bers who  discontinue  have  nothing  to  lose. 

PENALTIES   UPON   DISCONTINUANCE. 

It  is  necessary  to  add  this  qualification,  ' '  noth- 
ing to  lose."  If  every  member  of  such  a  society 
were  obliged  to  make  with  it  a  large  deposit  on  in- 
terest, to  be  forfeited  in  case  of  lapse,  the  power- 
ful cohesive  force  of  such  a  system  might  prevail 
against  the  annoyance  of  increasing  payments  and 
the  wiles  of  rival  agents.  The  idea  of  forfeiture  is 
so  unpalatable  that  some  have  come  to  regard  all 
forfeiture  as  unjust.  Is  it  so?  Why  should  an 
assessment  society  or  a  life  company  be  obliged  to 
bear  a  burden  for  which  it  gets  no  pay,  and  from 
which  the  fire  or  marine  insurance  company  is  free  ? 
These  other  companies  can  cancel  any  risk  when  it 
suits  them.    The  life  organization  is  required  to 


107 

carry  its  risk  till  death.  It  examines  the  risk  once 
for  all  at  the  beginning,  and  if  it  gets  a  single  pre- 
mium for  life,  it  makes  a  fair  bargain.  Both  sides 
are  on  an  equality.  The  company  aiid  the  policy- 
holder are  alike  compelled  to  carry  the  contract  for 
the  whole  of  life.  But  when  the  company  waives 
its  equitable  right  to  require  in  advance  a  single 
premium,  accepting  instead  assessments  or  premi- 
ums at  short  intervals,  and,  without  claiming  the 
right  to  discontinue  its  liability,  grants  to  its  mem- 
ber the  right  to  discontinue  his  payments  without 
loss,  it  gives  something  for  nothing.  I  have  no 
time  to  elaborate  this  point,  but  beg  you  to  bear  it 
in  mind.  The  fire  company  retains  the  right  to 
close  its  risk  at  any  time,  but  the  life  company  re- 
linquishes all  claim  to  such  a  right  for  a  considera- 
tion, and  this  consideration  is  called  penalty, 
forfeiture  or  surrender  charge.  If  it  should  impose 
no  penalty  it  would  give  something  for  nothing. 

Now  arises  another  question.  We  have  seen  that 
a  popular  life  company  need  not  lose  vitality 
through  lapsing.  When  it  incurs  disfavor,  and 
then  only,  it  suffers  loss  in  that  way.  Can  it  not 
afford  to  rely  on  the  continuance  of  approval,  and 
make  itself  still  more  popular  by  abolishing  the 
penalty,  even  though  it  does  admittedly  grant  a 
valuable  option  without  consideration,  and  so  give 
something  for  nothing?    I    answer    No,  for  two 


108 

reasons.  First,  it  has  no  right  to  hazard  its  perma- 
nent existence  on  the  rash  assumption  that  its 
operations  through  all  future  time  can  never  meet  a 
temporary  check.  A  life  company  has  too  many 
invaluable  interests  in  its  charge  to  take  wantonly 
the  risk  of  disaster  and  bankruptcy  arising  from 
the  speedy  disintegration  which,  in  the  absence  of 
penalties  upon  discontinuance,  must  occur  when- 
ever a  cloud  of  distrust  may  envelop  it  in  conse- 
quence of  some  temporary  mismanagement  or 
misfortune.  And  in  the  second  place,  we  must  rec- 
ollect always  that  no  popular  life  company  has  ever 
yet  actually  experienced  the  effects  of  the  abolition 
of  all  penalties.  The  penalty  in  some  form  has 
heretofore  stood  as  a  barrier  against  the  assaults  of 
rival  agents.  Can  any  one  suppose  that  the  life 
companies  could  successfully  have  preserved  in 
force  their  due  proportion  of  good  risks,  against  all 
the  interested  and  insidious  assaults  of  rival  agents, 
if  there  had  been  literally  no  penalty  upon  lapsing, 
if,  for  example,  every  policy-holder  could  have 
claimed  at  will,  at  any  moment,  his  supposed  tech- 
nical proportion  of  the  company's  funds  ?  No,  you 
cannot  presume  that  mere  general  popularity  can 
protect  you  against  rival  agents  if  you  impose  no 
penalty  ;  and  apart  from  that,  you  have  no  right 
to  stake  the  future  existence  of  your  company  on 
the  presumption  that  temporary  misfortune  or  mis- 


109 

management  can  never  possibly  occur.  A  penalty 
is  certainly  just,  for  no  one  is  bound  to  give  some- 
thing for  nothing  ;  and  it  is  not  only  just  but  also 
absolutely  necessary,  in  the  absence  of  some  other 
impregnable  element  of  cohesion,  to  every  society 
or  company  which  means  to  endure  for  all  time. 

ITiJURIOUS   PLANS   NOT  ALWAYS   FATAL. 

The  first  principle  which  I  have  enumerated  is 
that  you  must  make  your  plans  attractive  ;  the  sec- 
ond is  that  you  must  guard  against  any  future  in- 
crease in  cash  payments  ;  and  now  the  third  is  that 
you  must  not  permit  discontinuance  without  com- 
pensation, in  the  absence  of  some  other  sure  bond 
of  union.  If  any  one  of  these  three  fundamental 
principles  is  wholly  ignored  your  society  or  com- 
pany is  unsound.  On  the  other  hand,  of  course, 
it  is  possible  for  a  company  to  ignore  one  or  the 
other  of  these  principles  in  the  transaction  of  a 
small  part  of  its  business,  the  remainder  of  the 
business  being  conducted  judiciously,  and  in  this 
case  the  resulting  damage  is  only  that  which  arises 
from  that  particular  portion  of  the  business.  Take 
for  example  the  renewable  term  plan.  According 
to  this  plan  a  certain  premium  is  paid  annually  for 
ten  years,  then  a  higher  annual  premium  during 
the  succeeding  ten  years,  and  so  on,  the  premium 
increasing  by  steps  every  ten  years.     Companies 


110 

which  adopt  this  plan  have  usually  endeavored  to 
make  their  first  premiums  high  enough  to  yield 
eventually  dividends  which  may  prevent  in  reality 
the  future  increase  of  payments  which  is  nomi- 
nally stipulated.  If  their  foresight  is  good,  so 
that  the  payments  do  not  eventually  increase,  such 
companies  do  not  infringe  our  second  principle, 
which  warns  us  against  increasing  cash  payments. 
If  their  foresight  is  not  good,  the  damage  arises 
only  from  such  part  of  the  business  as  has  been 
done  on  that  particular  plan.  Again,  it  may  hap- 
pen that  a  plan  which  is  unsound  in  one  respect 
may  be  so  useful  in  another  that  the  evil  is  wholly 
or  partly  counterbalanced  by  the  good.  Take  for 
example  the  privilege  of  surrender  without  loss 
which  is  granted  by  many  companies  at  a  fixed 
period  named  in  the  policy  itself,  in  connection 
with  the  deferring  of  all  dividends  until  the  end 
of  the  same  period.  This  plan  is  defective  in  grant- 
ing a  privilege  of  surrender  without  loss,  notwith- 
standing that  the  privilege  is  granted  but  once  in 
the  existence  of  each  policy.  On  the  other  hand, 
apart  from  the  attractiveness  of  the  plan,  it  brings 
in  a  class  of  risks  of  unusually  good  quality,  and 
this  special  advantage  continues  until  the  end  of 
the  critical  period,  the  death  losses  among  policies 
of  this  class  being  particularly  light.  The  actu- 
aries who  originated  this  system  many  years  ago 


Ill 

knew  that  after  the  end  of  the  period  the  loss  on 
such  policies  as  remained  in  force  would  be  greater 
in  proportion  than  before,  and  this  expected  result 
has  actually  taken  place.     When  the  period  of 
maximum  surrender  value  arrives  the  holder  of- 
the  policy  is  besieged  by  every  agent  in  his  neigh- 
borhood, each  of  whom  has  had  for  years  in  his 
pocket-book  a  memorandum  of  the  exact  date  when 
that  precise  policy  would  be  available.     In  self- 
defense  the  agent  of  his  own  company  is  compelled 
to  join  in  the  scramble,  or  perhaps  he  too  has  had 
the  same   date  in  his  pocket-book  for  the  same 
reason.     It  results  that  a  large  proportion  of  the 
best  risks  claim  their  guaranteed  values  almost  as 
a  matter  of  course.    The  worst  risks  not  only  know 
that  they  need  the  insurance  and  cannot  get  it 
elsewhere,  but  are  advised  by  all  their  friends  in 
the  business  to  retain  it.    There  are  some  bad  risks 
who  surrender,  and  many  good  risks  who  refuse  to 
surrender,  but  on  the  whole  the  proportion  of  good 
risks  who  surrender  is  much  the  larger.     So  far  as 
anything  is  known  concerning  the  experience  of 
the  companies  which  have  been  working  longest 
on  this  plan,  the  loss  from  excessive  mortality  after 
the  end  of  the  period  is  just  about  what  the  actu- 
aries predicted  many  years  ago.     The  gain  arising 
from  this  plan,  due  to  lighter  mortality  before  the 
end  of  the  period,  is  no  doubt  greater  on  the  whole 


112 

than  the  loss  from  the  heavier  mortality  afterwards. 
There  are  other  forms  of  policy  contract,  involving 
options  in  the  future,  which  open  the  door  to  ad- 
verse variations,  by  which  for  example  a  bad  risk 
can  increase  his  insurance  or  reduce  his  premium 
payment,  or  a  good  risk  diminish  his  insurance, 
without  compensation  or  penalty.  As  a  rule  such 
options  are  introduced  merely  to  make  the  policy 
more  attractive  at  the  beginning,  but  they  are  sure 
on  the  whole  to  make  the  business  more  expensive 
in  the  end,  and  they  are  usually  devoid  of  any 
such  counterbalancing  advantage  as  that  which  I 
have  mentioned  as  belonging  to  the  deferred  divi- 
dend plan. 

MINOR  SUGGESTIONS. 

In  addition  to  the  three  fundamental  principles 
which  I  have  formulated,  there  are  various  minor 
observations  which  are  worth  noting,  but  which  I 
have  no  time  to  dwell  upon  just  now.  One  is  that 
plans  requiring  small  premiums  attract  on  the 
average  a  poorer  class  of  risks  than  plans  requir- 
ing large  premiums.  Another  is  that  while  making 
your  plans  attractive  you  must  avoid  making  them 
especially  attractive  to  bad  risks  or  to  persons  con- 
templating partial  or  total  suicide.  Another  relates 
to  a  form  of  fraud  which  consists  in  the  understate- 
ment of  age  in  order  to  reduce  the  premiums  pay- 


113 

able.  To  encourage  frauds  of  this  kind,  it  is  only- 
necessary  to  provide  expressly  in  each  policy  that 
any  one  who  understates  his  age,  and  so  secures 
60  per  cent,  more  insurance  than  the  premium  for 
his  real  age  will  buy,  shall  enjoy  all  he  pays  for  if 
discovered  and  50  per  cent,  more  if  not  discovered. 
Another  observation  is  that  if,  for  the  satisfaction 
of  honest  men,  a  policy  is  made  incontestable  after 
a  given  period,  it  should  at  least  retain  some 
terrors  meanwhile  for  those  who  bear  false  witness 
in  making  out  their  proposals  for  insurance. 
Another  is  that  it  is  well  to  avoid  any  peculiarity 
of  system  which  relieves  policy-holders  of  the  ne- 
cessity for  making  their  payments  promptly  at 
regular  intervals.  The  law  of  Massachusetts  was 
for  many  years  objectionable  in  this  respect,  the 
companies  of  that  State  suffering  severely  in  the 
resulting  disorganization  of  their  premium  collec- 
tions. 

PLANS  FOR  REDUCED  LEVEL  PREMIUMS. 

Returning  tg  our  three  main  principles,  you 
must,  apart  from  making  your  plans  attractive,  pre- 
vent any  future  actual  increase  in  the  annual  cash 
cost,  and  at  the  same  time  you  must  provide  for 
some  compensation  or  penalty  in  case  of  discon- 
tinuance. Both  of  these  necessary  requirements 
are  met  by  increasing  the  annual  cash  payment  to 


114 

a  point  which  will  obviate  the  necessity  of  any 
future  increase,  the  excess  of  the  earlier  payments 
being  held  as  a  reserve  fund.  In  after  years,  when 
the  annual  cash  payment  made  by  an  aged  policy- 
holder is  no  longer  sufficient  to  carry  the  current 
risk  on  his  life,  the  deficiency  is  made  up  by  draw- 
ing upon  the  reserve  fund.  By  thus  securing  an 
over-payment  in  the  earlier  years  of  insurance,  the 
company  secures  also  the  needed  element  of  cohe- 
sion, because  the  old  policy-holder  knows  that  he 
is  paying  less  than  he  would  now  have  to  pay  for 
the  same  insurance  at  his  present  age,  and  there- 
fore knows  that  he  is  losing  something  if  he  dis- 
continues his  insurance.  The  provision  of  a  re- 
serve, in  short,  prevents  the  injurious  increase  of 
cash  cost  and  prevents  also  the  possibility  of  dis- 
continuance without  loss.  It  is  now  generally  con- 
ceded that  a  reserve  of  some  sort  is  essential  to  the 
permanent  welfare  of  every  organization  which  de- 
votes itself  to  the  business  of  insuring  lives.  There 
is,  however,  some  disagreement  concerning  the 
amount  of  reserve  which  it  is  necessary  to  hold  for 
these  purposes.  It  may  be  admitted  at  once  that  if 
the  premiums  and  reserves  are  such  as  will  cer- 
tainly prevent  any  future  increase  of  cash  cost  to 
individual  policy-holders,  they  are  also  sufficient  to 
discourage  discontinuances.  The  disagreement  to 
which  I  refer  relates  therefore  only  to  the  amount 


115 

of  the  premiums  and  reserves  necessary  to  preclude 
the  possibility  of  increasing  cost.     Some  hold  that 
if  the  customary  surrender  values  are  withheld,  the 
annual  cash   cost  can   be  reduced  to  correspond, 
and  this  is   certainly    true.     Other  things  being 
equal,  the  amount  granted  annually  by  the  com- 
pany in  the  way  of  surrender  value  in  paid-up  in- 
surance or  otherwise  would,  if  saved,  enable  it  to 
increase  its  annual  cash  dividends  and  thereby  re- 
duce the  annual  cash  cost  of  each  policy  in  force 
receiving  such  dividends.     I  will  not  discuss  the 
justice  or  injustice  of  this  sort  of  return  to  the  old 
practice  of  universal  forfeiture.     It  may  be  claimed, 
and  cannot  easily  be  disproved,  that  such  a  course 
would  be  entirely  just  if  all  concerned  understood 
it  and  agreed  to  it  from  the  beginning.     In  fact, 
there  have  been  and  are  several  plans  of  insurance 
which  under  other  names  have  for  a  time  possessed, 
without  demur  from  any  quarter  on  the  score  of  in- 
justice, these  three  characteristics,  namely,  low  and 
uniform  cash  payments,  small  cash  reserve,  and  no 
real  surrender  value.     I  will  mention,  one  or  two  of 
these  plans  for  the  encouragement  of  those  who 
are  endeavoring  to  place  assessment  societies  upon 
some   sounder  basis,  so  as  to   secure   practically 
level  payments  without  holding  full  reserves.     For 
their  discouragement  I  have  to  add  that  as  yet  no 
one  of  these  plans  has  been  carried  on  successfully 


116 

for  so  long  a  time  as  to  remove  all  fear  of  its  fail- 
ure. 

One  such  plan  whicli  has  been  practiced  here 
and  there  by  regular  life  companies  is  the  renew- 
able term  plan,  of  which  I  was  speaking  a  while 
ago.  While  the  premiums  and  reserves  on  this 
plan  are  small,  the  premiums  have  nervertheless, 
in  some  cases  at  least,  been  computed  expressly 
with  a  view  to  the  prevention  of  any  future  in- 
crease in  cost  by  the  accumulation  of  surplus  and 
the  application  of  dividends  to  that  purpose.  The 
plai^i  is  still  on  trial,  with  the  chances  apparently 
against  its  permanent  success  with  the  rates  of 
premium  heretofore  charged. 

A  second  instance  may  be  found  in  a  plan  which 
some  of  us  are  old  enough  to  remember,  which  has 
long  been  abandoned,  but  which  for  a  time  domi- 
nated the  practice  of  life  insurance  in  this  country. 
It  was  called  the  half -note  plan.  One -half  of  each 
ordinary  life  premium  was  paid  in  cash,  and  the 
policy-holder  gave  what  was  called  a  note  for  the 
other  half.  In  case  of  lapse  the  companies  did  not 
collect  the  notes,  but  simply  cancelled  them. 
In  case  of  death,  the  companies  did  not  col- 
lect the  notes,  but  again  cancelled  them.  The 
losses  were  paid  in  full.  The  reserve  was  calcu- 
lated in  full,  and  the  notes  were  claimed,  and  prop- 
erly claimed,    as  technical  assets,    being  in  the 


117 

nature  of  an  offset  to  a  portion  of  the  reserve.  The 
real  cash  reserve  consisted  of  the  nominal  or  tech- 
nical reserve  less  the  outstanding  notes.  No  sur- 
render value  was  paid,  except  of  course  the  can- 
cellation of  the  so-called  notes.  As  the  notes  were 
marked  up  as  assets,  their  cancellation  in  case  of 
lapse  was  entered  as  a  charge  to  the  account  of 
surrender  values,  and  in  case  of  death  to  the  ac- 
count of  dividends.  Looking  only  at  the  cash  ele- 
ments of  the  transaction,  and  disregarding  these 
phantom  notes,  we  see  a  reduced  cash  reserve,  no 
real  surrender  value,  no  real  dividend,  but  on  the 
other  hand  the  payment  in  full  of  the  insurance 
money  in  case  of  death.  As  regards  cash  cost, 
there  was  a  little  increase  for  four  years  only.  The 
first  year  the  cash  cost  consisted  of  one-half  the 
nominal  premium.  The  second  year  the  cash  cost 
was  53i  per  cent.,  the  third  year  57  per  cent.,  the 
fourth  year  60^  per  cent,  and  the  fifth  year  64  per 
cent,  of  the  nominal  premium.  There  was  no 
further  increase,  but  the  cash  cost  remained 
fixed  at  64  per  cent,  of  the  nominal  premium.  The 
increase  which  took  place  for  a  few  years  rep- 
resented interest  on  the  outstanding  notes,  be- 
cause every  year  a  note  was  taken  for  50  per  cent, 
of  the  nominal  premium,  and  interest  was  col- 
lected at  the  rate  of  7  per  cent.  The  rea- 
son   why    the    cash    cost  never   increased  above 


118 

64  per  cent,  of  the  nominal  premium  was 
that  the  number  of  notes  outstanding  never 
exceeded  four.  Whenever  a  new  note  was  taken 
after  the  fourth,  an  old  note  was  returned  and 
charged  on  the  accounts  as  a  dividend.  The  policy- 
holders submitted  readily  to  an  increase  of  cash 
cost  for  four  years,  because  they  knew  that  every 
policy  more  than  four  years  old  was  relieved  from 
further  increase.  The  system  was  really  neat  and 
satisfactory  as  long  as  it  lasted.  It  lasted  until  it 
broke  down.  It  broke  down  because  the  cash  pay- 
ments were  too  low,  so  that  the  burden  finally  be- 
came greater  than  the  compailies  which  practiced  it 
could  bear.  Nevertheless  the  system  actually 
worked  for  many  years,  and  the  companies  which 
practiced  it  built  up  considerable  business,  one  of 
them  becoming  for  a  time  the  largest  in  the  country. 
The  precise  point  where  the  plan  broke  down  was 
that,  the  nominal  dividends  which  the  system  com- 
pelled the  companies  to  grant  increased  faster  than 
the  nominal  divisible  surplus.  It  was  therefore 
necessary  to  reduce  the  dividends,  which  up  to  that 
time  had  amounted  on  each  policy  to  exactly  one- 
half  of  the  annual  premium,  in  addition  to  the 
dividends  which  consisted  in  returning  notes  after 
death.  Fortunately,  as  it  happened,  it  became 
generally  agreed  about  that  time  that  the  proper 
method  of  dividing  surplus  was  to  make  small  divi- 


119 

dends  on  new  policies  and  larger  dividends  on  old 
policies,  in  accordance  with  the  so-called  "  contri- 
bution plan"  for  the  division  of  surplus.  It  was 
therefore  still  possible  to  give  fairly  large  dividends 
to  the  older  policies,  so  that  the  actual  increase  in 
cost  never  became  unbearable,  but  it  was  impossible 
to  continue  the  half -note  system  in  connection  with 
the  contribution  plan  of  dividends,  because  there 
was  no  longer  any  definite  certainty  of  a  50  per 
cent,  dividend  at  the  end  of  four  years  and  annually 
thereafter.  The  change  produced  some  discontent 
among  the  older  policy-holders,  but  as  they  contin- 
ued to  receive  fairly  large  dividends  their  cash  pay- 
ments did  not  increase  beyond  endurance.  It  was 
however  necessary  to  drop  the  half -note  plan  for  new 
business.  The  plan  which  was  effective  and  popu- 
lar as  long  as  the  public  believed  that  they  could 
rely  on  the  strict  limitation  of  the  outstanding 
notes  became  untenable  when  they  realized  that  the 
number  of  notes  on  one  policy  would  increase  to 
five,  six,  eight,  or  more,  and  that  in  case  of  death 
the  outstanding  notes  were  no  longer  returned  as 
mortuary  bonuses,  but  were  deducted  from  the  in- 
surance money  paid.  The  stronger  note  companies 
were  able  to  make  a  change  to  the  cash  premium 
basis  and  to  continue  business  in  good  repute. 
Some  weaker  companies  failed.  For  a  time  some 
business  was  done  here  and  there  with  notes  equal 


120 

to  one-third  of  the  premium,  but  even  as  thus  modi- 
tied  the  note  system  did  not  survive. 

Concerning  all  attempts  to  reduce  premiums  by- 
reducing  reserves  and  surrender  values,  we  have 
■just  this  criterion  by  which  to  judge.  If  the  cash 
premiums  actually  paid  by  contented  policy-holders 
are  guarded  against  any  serious  permanent  increase 
in  the  future,  beyond  the  possibility  of  doubt,  the 
system  is  sound.  Experience  shows  that  the  full 
level  premium  system  is  always  safe,  assuming  or- 
dinary good  management,  and  experience  has  not 
as  yet  shown  the  same  concerning  any  modification 
of  the  full  level  premium.  The  difficulty  is  just 
here  :  to  insure  safety,  you  cannot  fix  your  premi- 
ums much  below  the  usual  non-participating  fig- 
ures ;  and  unless  you  do  fix  them  decidedly  below 
those  figures,  the  public  will  continue  to  prefer  the 
customary  plan  which  provides  paid-up  insurance 
in  case  of  discontinuance. 

STANDARDS   OF  MORTALITY   AND   INTEREST. 

What  I  have  said  hitherto  concerning  plans  re- 
lates to  general  principles  and  their  applications. 
To  put  these  principles  into  practice  you  must  know 
how  to  compute  premiums  and  reserves.  The  first 
thing  necessary  is  a  mortality  table.  This  should 
be  taken  so  as  to  be  on  the  safe  side.  For  insur- 
ances, your  table  must  show  at  all  ages  a  mortality 


121 

somewhat  greater  than  experienced  by  good  com- 
panies after  the  effect  of  medical  selection  has  worn 
off,  that  is,  after  four  or  five  years  from  the  be- 
ginning of  each  policy.  For  annuities,  if  you  deal 
in  them,  your  table  must  be  on  the  safe  side  in  the 
opposite  direction  ;  it  must  show  at  each  age  a  mor- 
tality at  least  as  light  as  that  experienced  on  previ- 
ous annuity  business,  because  in  this  case  the  dan- 
ger which  the  company  has  to  guard  against  is  not 
excessive  mortality  but  excessive  longevity.  The 
latter  table  should  also  be  used  for  pure  endow- 
ments, or  contracts  to  pay  a  certain  sum  on  the  at- 
tainment of  a  certain  age,  without  insurance  in  case 
of  previous  death.  For  contracts  in  which  these 
two  opposite  principles  are  combined,  one  or  the 
other  of  these  tables  should  be  used,  according  to 
the  feature  which  is  predominant ;  and  sometimes, 
where  options  are  given,  both  tables  should  be 
used.  For  example,  if  you  combine  a  term  insur- 
ance up  to  a  certain  age  with  an  annuity  after  that 
age,  one  or  the  other  table  should  be  used  accord- 
ing to  your  judgment  of  the  predominating  ele- 
ment ;  but  if  there  is'  an  option  for  discontinuance 
without  loss  at  the  time  the  change  occurs,  you 
will  need  to  use  the  insurance  table  for  the  insur- 
ance and  the  annuity  table  for  the  annuity.  From 
this  point  on,  I  shall,  as  regards  tables,  confine  what 
I  have  to  say  to  the  use  of  the  insurance  table. 


OF   THE 

UNIVERSITY 

Of 


122 

Another  element  which  you  have  to  assume  in 
advance  is  the  rate  of  interest  to  be  relied  upon  as 
obtainable  upon  investments. 

CALCULATION   OF   SINGLE  PREMIUMS. 

Without  going  into  mathematics,  it  is  possible  to 
show  in  a  few  words  how  premiums  on  a  single  life 
may  be  calculated.  For  every  possible  risk  there  is 
a  net  single  premium,  and  this  must  be  increased 
by  a  loading  or  margin  for  contingencies,  including 
such  expenses  as  are  not  otherwise  provided  for. 
To  explain  how  a  net  single  premium  may  be  cal- 
culated, I  invent  for  this  occasion  the  term  *' insur- 
ance unit."  This  means  the  single  premium  at  the 
present  age  for  one  year' s  insurance  of  one  dollar 
at  any  given  future  age.  It  is  plain  that  if  you 
once  have  these  units  calculated  for  all  ages,  you 
can,  merely  by  adding  them  together,  find  the 
single  premium  for  any  possible  insurance.  For 
example,  for  a  whole  life  insurance,  uniform  in 
amount,  you  have  only  to  add  the  successive  units 
for  each  year  throughout  the  future,  and  multiply 
the  sum  by  the  amount  insured.  For  an  insurance 
of  which  the  amount  is  to  vary  from  year  to  year, 
you  need  only  multiply  the  unit  for  each  year  by 
the  amount  to  be  insured  in  that  year,  and  add. 
For  a  term  insurance,  you  need  take  only  the  units 
for  the  years  included  within  the  term.     For  a  de- 


123 

ferred  insurance,  you  will  begin  with  the  unit  for 
such  future  year  as  may  be  fixed  upon  for  the  be- 
ginning of  the  insurance.  It  might  even  be  possible 
in  this  way  to  fix  a  single  premium  for  an  inter- 
mittent insurance,  ceasing  at  one  time  and  begin- 
ning again  at  another.  No  one  has  ever  actually 
calculated  such  a  table  of  insurance  unitsf  the  idea 
of  which  I  introduce  on  this  occasion  merely  to  in- 
dicate what  might  be  done,  and  to  show  how  simple 
and  intelligible  the  theory  is  in  reality,  if  we 
choose  to  look  at  it  in  this  way.  The  usual  mathe- 
matical formulae  give  the  same  result  with  less  work. 
The  actual  calculation  of  each  insurance  unit 
would  not  be  difficult.  For  example,  if  the  pres- 
ent age  is  40,  let  us  see  how  we  may  compute  the 
insurance  unit  which  consists  of  the  present  net 
single  premium  to  insure  one  dollar  payable  ten 
years  hence  in  case  death  occurs  during  the  tenth 
year.  Let  us  suppose  that  the  table  gives  962 
persons  dying  in  the  tenth   year    hence  out   of 


*Siiice  this  address  was  delivered,  the  writer  has  been  informed  by 
Mr.  Walter  C.  Wright  that  the  late  Elizur  Wright  once  calculated 
a  partial  table  of  this  sort,  which  still  exists  in  manuscript.  There 
is  of  course  nothing  new  in  the  quantities  here  called  "insurance 
units,"  with  the  use  of  which  in  computing  single  premiums  for 
uniform  whole  life  insurance  actuaries  are  generally  familiar.  The 
obje<  t  of  giving  a  name  to  them  at  this  time  is  because  of  the  sug- 
gested use  of  the  same  units  for  all  kinds  of  insurances,  a  suggestion 
which  is  probably  novel.  A  similar  remark  applies  to  the  "  value 
units  "  subsequently  introduced. 


124 

78,106  persons  now  living  at  age  40  and  that  the 
assumed  rate  of  interest  is  4  per  cent.  The  tables 
of  compound  interest  show  that  one  dollar  ten 
years  hence  is  worth  67J  cents  to-day.  To  provide 
a  fund  of  $962  payable  ten  years  hence,  at  the  rate 
of  one  dollar  for  each  death,  we  have  merely 
to  discount  this  $962  for  compound  interest,  by 
taking  67^  per  cent,  of  it,  and  then  to  divide  this 
discounted  value  among  78,106  contributors.  The 
general  rule  for  calculating  insurance  units  is 
therefore  to  discount  the  fund  needed  at  a  certain 
future  period  to  provide  one  dollar  for  each  death 
in  the  last  year  of  the  period,  the  discounted 
value  so  found  being  afterwards  divided  by  the 
present  number  living. 

You  will  also  need  a  table  of  what  we  may 
call  'Walue  units."  What  I  call  a  value  unit 
is  the  present  value  of  one  dollar  to  be  paid  at 
a  given  time  in  case  the  insured  is  then  living.  In 
this  case  the  future  fund,  comprising  one  dollar 
for  each  person  then  living  according  to  the  table, 
is  to  be  discounted  and  divided  by  the  number 
now  living.  Such  a  table  of  value  units  enables 
us,  for  example,  to  get  the  present  single  premium 
for  an  endowment  payable  at  a  certain  age,  and  if 
this  be  added  to  the  single  premium,  for  insurance 
meanwhile,  we  have  the  total  single  premium 
for  an  endowment  insurance  policy.     Or,  if  the 


125 

plan  contemplates  the  payment  of  different  sums  to 
the  insured  at  different  times,  in  addition  to  the 
insurance,  the  table  of  value  units  enables  us  at 
once  to  pick  out  the  items  which  go  to  make 
up  the  single  premium  for  the  entire  contract. 

CALCULATION    OF    ANNUAL    PREMIUMS. 

One  of  the  chief  uses  of  such  a  table  of  value 
units  would  be  to  find  the  present  value  of  future 
net  premiums.  If  a  net  annual  premium  of  one 
dollar  is  payable  in  advance,  and  one  dollar  annu- 
ally thereafter  during  life,  the  present  value  of  all 
these  future  premiums  can  be  found  by  adding  to 
the  first  dollar  the  value  units  for  one  year  hence, 
two  years  hence,  and  so  on  to  the  end  of  the  table, 
unless  the  premiums  are  to  stop  after  a  certain 
fixed  number  of  years.  Let  us  call  the  present 
value  of  these  future  premiums,  whatever  the  pre- 
mium-paying period  may  be,  the  dollar  factor. 
If  we  know  the  amount  of  the  net  annual  premium 
to  be  paid  on  a  certain  contract,  we  can  get 
the  present  value  of  all  future  premiums  by  multi- 
plying the  amount  of  one  premium  by  the  dollar 
factor.  On  the  other  hand,  if  we  do  not  know 
the  amount  of  the  net  annual  premium  chargeable 
for  a  new  policy,  which  of  course  ought  to  be 
equivalent  in  money  value  to  the  net  single  pre- 
mium, we  can  find  the  annual  premium  by  divid- 


126 

ing  the  single  premium  by  the  dollar  factor.  In 
this  way  it  is  easy  to  calculate  premiums  of  any 
sort  for  any  kind  of  policy.  If  the  premiums  are 
to  vary  in  amount,  the  dollar  factor  can  be  made 
up  accordingly,  beginning  with  one  dollar  the  first 
year,  and  picking  out  the  successive  value  units  for 
future  years  increased  or  decreased  in  the  desired 
proportion  so  as  to  make  up  the  dollar  factor  re- 
quired. The  net  annual  premium  alone  is  not  suf- 
ficient to  enable  a  life  company  to  meet  its  ex- 
penses and  to  provide  against  any  future  adverse 
fluctuation  of  mortality  or  interest.  You  must 
therefore  add  a  margin  or  loading,  the  amount 
of  which  cannot  vary  much  from  the  figures  in 
general  use  with  other  companies.  An  established 
life  company  has  various  proper  sources  upon 
which  to  draw  towards  meeting  its  expenses,  apart 
from  the  loading  on  its  premiums.  The  expense  of 
caring  for  investments  should  be  taken  from  the 
income  derived  from  the  investments.  It  is  uni- 
versally agreed  that  whatever  a  company  retains 
from  the  payments  of  a  defaulting  member,  by  way 
of  penalty  or  surrender  charge,  should  be  appro- 
priated towards  paying  the  cost  of  replacing  the 
risk  withdrawn.  It  has  in  fact  been  laid  down  as 
a  reasonable  rule  that  the  penalty  or  surrender 
charge  ought  not  to  exceed  the  cost  of  replacing 
the  risk  withdrawn.     In  practice  it  is  never  large 


127 

^nough  to  cover  that  cost,  but  whatever  is  retained 
should  be  devoted  towards  that  object.  Again,  the 
actual  death  loss  ought  not  to  be  so  large  as  the  ex- 
pected loss,  and  the  difference  is  available  for  the 
company's  needs.  Sometimes  there  are  other 
sources  of  profit,  and  if  non -participating  business 
is  done,  that  also  is  a  source  of  profit.  A  com- 
pany's expenses  are  however  not  usually  covered 
from  these  various  sources,  and  the  remainder  of 
the  expenses  must  be  met  from  the  margins  on  the 
premiums. 

CALCULATION   OF   KE8ERVES. 

As  regards  reserves,  the  reserve  on  all  policies 
is  the  same  as  the  net  single  premium  :  but  from 
this  is  deducted  the  present  value  of  the  future  net 
premiums  receivable,  if  any.  In  this  country  each 
future  net  premium  is  taken  at  the  amount  which 
would  be  computed  as  the  original  net  premium  for 
the  risk  according  to  the  standard  by  which  the 
reserve  valuation  is  made.  In  other  countries  the 
future  net  premium  is  often  taken  according  to 
some  other  standard,  and  sometimes  it  is  taken 
by  making  a  certain  deduction  from  the  gross 
premium.  Whatever  differences  of  opinion  exist 
concerning  reserves,  they  usually  depend  on  dif- 
ferences of  method  in  calculating  the  future  net 
premium.     The    mode    of    calculating    the   value 


128 

of    each   dollar  of  net  premium    is    always    the 
same. 

It  is  necessary  to  compute  the  reserves  on  all 
policies  by  the  same  assumed  standard  of  mor- 
tality, because  the  computer  cannot  tell  which 
risks  are  still  good  and  which  impaired,  and  the 
average  table  is  known  to  be  a  safe  guide  on  the 
whole.  It  is  not  true  that  the  real  liability  of  a 
company  on  $10,000  of  paid-up  life  insurance  is  the 
same  for  a  man  on  his  death-bed  as  it  is  for  the 
best  risk  on  the  books.  In  the  one  case  the  real 
liability  is  far  larger,  in  the  other  far  smaller,  than 
the  average  reserve  computed  by  the  usual  average 
mortality  table. 

PRESSURE  OF   EXISTING  RESERVE  LAWS. 

The  net  reserve  system  has  many  elements  of  ad- 
vantage, but  there  is  one  evil  connected  with  it 
which  it  was  heterodox  to  discuss  thirty  years  ago, 
but  which  is  now  widely  understood  and  admitted. 
This  evil  consists  in  the  requirement  that  a  reserve 
must  be  laid  aside  out  of  the  first  year's  premium. 
I  am  speaking  particularly  of  ordinary  life  policies, 
and  what  I  have  to  say  requires  qualification  if 
applied  to  any  other  form.  It  has  long  been  recog- 
nized that  the  expense  attending  the  procurement 
of  business  is  so  great  as  to  permit  no  actual  accu- 
mulation of  reserve  out  of  the  first  year's  premium. 


129 

The  risks  have  ust  passed  the  doctor,  it  is  true, 
yet  death  losses  will  occur  within  the  first  year, 
and  must  be  paid.  Apart  from  the  commissions  to 
agents,  there  are  other  well-known  expenses  at- 
tending the  prosecution  of  new  business,  and  these 
other  expenses  are  in  some  companies  greater  in 
amount  than  the  commissions  paid  for  new  business. 
While  not  always  strictly  true,  it  may  be  laid  down 
as  a  general  statement  that  the  commissions  and 
the  other  expenses  taken  together  will  use  up  pretty 
much  all  of  the  first  premium. 

The  highest  living  authority.  Dr.  Sprague  of 
Edinburgh,  called  attention  some  time  since  to  the 
fact  well  known  in  Great  Britain,  that  the  expenses 
of  new  business  practically  consume  the  first  pre- 
mium, and  proposed  that  the  reserve  should  begin 
to  be  accumulated  out  of  the  second  premium. 
There  is  much  to  be  said  for  this  proposition,  par- 
ticularly in  the  case  of  companies  newly  organized, 
which  have  no  assistance  from  any  of  the  sources 
of  miscellaneous  profit  which  an  established  com- 
pany possesses,  such  as  annuities  and  non-partici- 
pating insurances,  and  no  penalties  contributed  by 
retiring  policy-holders  towards  the  expense  of  re- 
placing the  discontinued  risks. 

While  other  causes  were  at  work,  the  chief  cause 
of  the  universal  slaughter  of  small  companies,  which 
took  place  about  twenty -five  years  ago,  was  the 


130 

legal  requirement  of  a  reserve  in  the  first  year  of 
each  policy.  The  energies,  which  in  this  growing 
country  might  have  been  turned  toward  the  estab- 
lishment of  new  and  prosperous  life  companies, 
were  directed  by  this  reserve  difficulty  into  another 
channel,  and  a  great  cry  arose  for  life  insuranc  ^ 
without  reserves.  Had  Dr.  Sprague's  proposal 
been  available  under  our  laws,  we  should  have 
heard  comparatively  little  of  assessment  insurance 
with  all  its  good  and  all  its  evil. 

What  is  the  remedy  ?  The  old  life  companies  do 
not  need  one ;  and  yet  there  should  be  no  legal 
distinction  between  them  and  the  newer  organiza- 
tions. As  regards  the  latter  class,  at  any  rate,  the 
remedy  is  plain.  Make  no  attempt  to  enforce  State 
valuations.  Repeal  all  laws  assuming  to  regulate 
contracts.  On  the  other  hand,  require  of  every  so- 
ciety absolute  publicity  concerning  the  essential 
elements  of  its  accounts,  including  its  reserve  val- 
uations. It  is  many  years  since  I  first  had  occasion 
to  express  my  opinion  on  this  subject.  My  advice 
then  was  given  in  two  words,  in  which  I  sum  up 
my  advice  now  :  freedom  and  publicity. 

W.  S.  NICHOLS: 

In  view  of  the  brief  opportunity  afforded  me  for 
a  preparation  which  has  only  been  completed  since 


131 

my  arrival  at  Milwaukee,  I  am  [sure  [that  I  may 
fairly  claim  your  indulgence  for  the  imperfections 
of  my  remarks.  No  opportunity  has  been  afforded 
me  to  traverse,  even  were  IJso  dis5)osed,  the  compre- 
hensive paper  submitted  by  Mr.  McClintock.  My 
only  reference  to  it  will  be  a  reinforcement  from 
personal  experience  of  one  important  point  he 
made.  Nor  shall  1  attempt  any  connected  didac- 
tic treatment  of  a  subject  so  wide  in  its  scope  as 
general  life  insurance  plans,  but  shall  merely  ask 
your  attention  to  a  phase  of  this  question  which, 
in  view  of  the  character  of  this  gathering  and  of 
the  topics  assigned,  is  not  so  likely  to  be  empha- 
sized. 

I  know  of  no  better  way  to  present  the  first  lead- 
ing thought  that  is  in  my  mind  than  by  narrating 
an  incident  which  occurred  some  forty  years  ago. 
When  Powers'  noted  statue  of  Daniel  Webster 
was  unveiled  at  Boston,  Edward  Everett  was  the 
orator  of  the  occasion.  The  rain  was  falling  in  tor- 
rents and  at  the  last  moment  the  ceremonies  were 
transferred  from  the  open  in  front  of  the  State 
House  to  Boston' s  spacious  Music  Hall.  The  whole 
address  was  masterly,  but  one  who  was  an  eye-wit- 
ness has  described  the  scene  when  the  scholarly 
orator  addressed  himself  to  that  grandest  of  Web- 
ster' s  forensic  efforts,  his  Reply  to  Hayne.  Everett 
was  with  the  great  statesman  on  the  evening  pre- 


132 

ceding  its  delivery.  The  Senate  had  adjourned 
overwhelmed  with  the  brilliant  oratory  of  South 
Carolina' s  foremost  champion.  Webster  is  crushed  ; 
such  was  the  humiliating  conviction  that  impressed 
every  New  England  man  that  night  but  one.  Ever- 
ett found  Webster  in  the  evening  calm  and  even 
sportive,  but  in  the  morning  he  describes  him  thus  : 
"  He  was  like  some  mighty  admiral,  dark  and  ter- 
rible, casting  the  shadow  of  his  frowning  tiers  far 
out  over  a  sea  which  seemed  to  sink  beneath  him  ; 
the  Stars  and  Stripes  at  the  fore,  the  mizzen  and 
the  peak,  and  bearing  down  like  a  tempest  upon 
his  antagonist  with  all  his  canvas  straining  to  the 
breeze  and  all  his  thunders  roaring  from  his  broad- 
sides." 

The  scene  which  followed  the  delivery  of  these 
impassioned  words  baffles  description.  The  audi- 
ence was  made  up  from  every  rank  in  life.  The 
learned  professor  and  the  wealthy  merchant  were 
rubbing  elbows  with  draymen  and  porters,  but 
Everett  had  touched  the  chord  of  their  common 
humanity  and  all  differences  of  rank  or  culture 
were  lost  in  the  general  outburst  of  enthusiasm 
that  greeted  this  resplendent  picture  of  Massa- 
chusetts' favorite  son. 

Gentlemen,  this  story  may  seem  to  have  little 
relation  to  the  subject  before  us,  but  I  have  told  it 
for  a  purpose.    The  secret  of  that  eloquence  which 


183 

for  the  nonce  placed  the  scholar  and  the  boor  on 
the  same  footing,  alike  captivated  by  the  majesty 
of  the  thoughts,  was  the  secret  of  true  eloquence 
since  the  world  began,  whether  flowing  from  the 
lips  of  some  cultured  Athenian  on  Mars'  Hill,  or, 
3000  years  later,  from  some  poor  Logan  depicting 
the  wrongs  of  his  savage  kindred.  It  was  the 
dramatic  element  in  oratory,  which,  brushing  aside 
all  abstractions  and  metaphysical  refinements,  gets 
home  to  nature  and  makes  the  concept  a  thing  of 
life  where  qualities  are  transformed  into  living  men 
and  things,  that  appeal  to  the  deepest  instincts  of 
our  common  nature. 

Gentlemen,  the  principle  to  which  I  am  thus 
calling  your  attention,  is  of  wide  application :  In 
other  forms  we  may  recognize  it,  in  the  general 
drift  of  all  our  modern  methods,  whether  of  work 
or  study.  The  master  minds  of  the  day  find  their 
best  text  books  in  nature.  Dull  abstractions  are 
no  longer  the  badge  of  scholarship  ;  even  our  little 
ones  go  to  the  kindergarten  and  are  taught 
from  Nature's  open  books.  It  is  a  principle,  too, 
which  has  its  application  to  business  and  even  to 
insurance.  Few  business  branches  have  been  the 
subject  of  more  refined  and  subtle  analysis  and 
speculative  theorizing  than  has  life  insurance. 
We  have  analyzed  the  income  and  the  expenditures, 
the  assets  and  the  liabilities  ;  we  have  sought  to 


134 

trace  each  little  rivulet  to  its  source  and  compute 
to  a  nicety  the  relations  which  it  should  bear  to 
the  common  stream  of  which  it  forms  a  part.  We 
have  expended  our  ingenuity  in  devising  formula 
and  prescribing  rules  of  co-ordinating  each  specific 
department  of  the  business ;  we  have  dealt  with 
it  as  does  the  engineer  with  his  bridge  when  he 
computes  the  load  it  must  bear  and  apportions 
the  strain  to  each  separate  cable  and  girder  and 
stay. 

But  I  am  not  sure  in  doing  all  this  we  have  not 
reckoned  too  little  on  the  fact  that  a  great  business 
enterprise  like  this  is  a  thing  instinct  with  life ; 
that  behind  the  questions  of  reserves  and  dividends 
and  surrender  values  and  the  rest,  are  those  subtle 
features  of  concrete  management  by  living  men  to 
which  these  are  all  subordinate.  As  in  music  no 
written  laws  can  prescribe  and  no  written  score  can 
indicate  the  soul  which  the  master  mind  of  a 
Beethoven  or  Mozart  must  create,  so  I  conceive  it 
is  in  discussing  the  character  and  standing  and 
plans  of  a  great  life  insurance  office  with  its  inflow 
and  outflow  of  members  and  resources  and  obli- 
gations and  claims  through  hundreds  of  scattered 
agencies,  in  every  corner  of  the  land.  No  analytic 
formula  can  be  devised  nor  law  prescribed  which 
can  accurately  measure  the  real  strength  or  weak- 
ness of  such  a  company  nor  the  merits  of  its  busi- 


135 

ness  methods  by  merely  stating  in  cold  figures  on 
a  balance  sheet  the  various  items  which  go  to  make 
up  its  resources  and  its  obligations.  Such  too,  I 
think,  is  the  judgment  of  many  of  the  best  experts. 
It  is  where  our  whole  theory  of  American  life  in- 
surance crosses  lines  with  the  conceptions  of  the 
business  in  some  foreign  parts.  We  have  em- 
phasized the  cold  figures  which  are  supposed  to 
show  the  resources  and  the  strength  ;  we  treat  it  as 
it  were  by  dissection,  separately  weighing  each 
portion  on  our  artificial  scales  as  though  it  were  a 
dead  cadaver.  The  foreign  expert  rather  views  his 
company  as  a  thing  of  life  with  vitalizing  forces 
coursing  through  its  veins,  striving  to  repair  the 
waste  of  disease  and  give  strength  to  feeble  parts. 
I  believe  that  the  business  and  the  plans  of  a  great 
life  company  should  be  studied  as  the  physician 
studies  and  diagnoses  the  living  man,  rather  than 
as  the  mechanical  engineer  computes  the  factors  of 
his  lifeless  bridge.  No  mere  rules  of  rhetoric  can 
teach  us  to  create  the  masterpieces  of  Everett  or 
Webster  or  Hayne ;  nor  slavish  obedience  to  the 
laws  of  music  to  reproduce  the  works  of  a  Haydn 
or  Mozart.  Neither  can  the  mere  slavish  applica- 
tion of  life  insurance  rules  enable  us  to  thoroughly 
gauge  the  elements  which  enter  into  the  manage- 
ment of  a  successful  life  insurance  institution. 
Every  company  has  its  own  individuality  and  its 


136 

own  special  lines  along  which,  like  a  thing  of  life, 
it  moves  on  to  success  or  failure. 

The  point  I  am  aiming  at  in  all  this,  must,  I 
think,  be  obvious.  I  am  delimiting  the  sphere 
within  which  the  mere  analysis  of  life  insurance 
figures  are  to  be  treated  as  sufficient  tests.  No 
matter  what  may  be  the  personal  element  involved, 
success  must  lie  in  a  reasonable  conformity  to  well- 
established  principles — this  all  must  admit.  I  am 
not  seeking  to  undervalue  the  usefulness  of  the 
most  searching  analysis  to  which  the  business  of  a 
company  can  be  subjected,  but  simply  raise  the 
question  whether  cold  examination  of  the  empty 
figures  apart  from  the  living  company  of  which 
they  are  the  product,  can  always  tell  us  the  story. 
Let  me  illustrate.  If  I  am  correctly  informed,  one 
of  our  oldest  and  largest  life  insurance  institutions 
in  its  early  days  had,  through  the  lack  of  actuarial 
skill  by  its  management,  been  brought  to  a  con- 
dition of  technical  insolvency.  Fortunately  there 
were  as  yet  no  rigid  laws  nor  supervising  official 
powers  to  take  cognizance  of  its  condition.  Its 
affairs  were  in  a  state  of  youthful  vigor,  and,  left 
alone,  Nature  quietly  healed  the  wound  without  a 
scar.  How  different  might  have  been  its  fate 
if  some  official  judgment  had  been  pronounced 
against  it  on  the  mere  strength  of  the  figures.  I 
have  in  mind  too,  the  early  struggles  of  another 


137 

great  institution  at  a  later  date.  It  was  an  ex- 
periment in  its  way,  and  at  the  start  commanded 
little  confidence  or  support  outside  of  the  few 
master  minds  that  were  planning  its  course  and 
shaping  its  policy.  Year  after  year  its  develop- 
ment was  a  depressing  work.  Any  rigid  analysis 
of  the  figures  might  have  shown  the  ear-marks  of  a 
swiftly  approaching  insolvency.  Its  friends  had 
deserted  it.  A  laxity  of  Department  rules  per- 
mitted its  real  condition  to  be  partially  concealed 
by  allowing  as  assets  items  which  would  now  be 
debarred.  That  was  the  salvation  of  the  company. 
The  men  who  were  directing  it  saw  ahead,  as  the 
onlookers  could  not,  where  their  plans  were  leading, 
and  while  those  onlookers  were  waiting  for  the 
end  that  institution  had  quietly  turned  the  corner 
and  begun  its  triumphal  march  to  one  of  the 
grandest  successes  in  its  line. 

My  point  is  this,  that  plans  or  conditions  which 
govern  the  success  or  failure  of  a  life  insurance 
company  must  often  be  sought  for  beyond  the 
mere  figures  of  an  official  report,  and  no  judgment 
based  on  such  figures  can  be  complete  that  takes 
no  note  of  what  I  choose  to  call  the  vital  elements 
of  a  company.  The  sculpture  may  be  as  perfect  as 
the  chiseled  marble  of  a  Phidias  or  a  Praxiteles, 
and  yet  as  cold  and  lifeless  as  a  corpse. 

Now,  permit  me  by  aid  of  another  illustration  to 


138 

lay  before  you  my  second  thought  regarding  life 
insurance  plans.  From  the  days  of  Pythagoras 
down  to  the  present,  the  world  has  been  occupied 
with  warring  schools  of  philosophy  searching  for 
the  ultimate  foundations  of  knowledge.  No  school 
has  agreed  with  any  other.  Hegel  and  Descartes 
and  Locke  and  Spencer  and  the  rest  have  each  had 
their  admiring  followers,  and  the  unsympathetic 
onlooker  is  tempted  to  exclaim,  "  A  plague  to  all 
your  Houses."  You  are  pursuing  a  phantom  in  an 
idle  quest  for  truth.  Not  so ;  the  philosophy  of 
every  age  and  nation  is  simply  the  reflex  of  its 
own  peculiar  thought  and  character.  The  truth 
for  which  they  are  searching  is  one,  but  many- 
sided  ;  and  every  age  and  people  is  but  picturing 
the  side  which  ])resents  itself  to  them.  So  is  it  re- 
garding life  insurance  plans.  Each  company  has 
its  special  features,  its  special  policy  forms,  which 
it  urges  in  preference  to  any  other.  But  the  want 
which  they  are  aiming  to  supply  is  many-sided. 
The  policy  or  company  that  is  the  best  for  one 
may  not  be  the  best  for  another.  There  is  no  such 
thing  in  my  opinion  as  a  best  policy  and  a  best 
company  for  every  man  alike,  and  a  greater  dis- 
aster could  hardly  fall  on  the  business  of  life  in- 
surance than  the  setting  up  of  a  faultless  model 
after  which  every  institution  must  be  patterned. 
Life  insurance,  like  philosophy,  is  art  as  well  as 


139 

science.  As  well  miglit  we  demand  that  because 
the  Parthenon  was  the  mbst  perfect  of  its  kind, 
all  that  is  grand  and  noble  in  the  Egyptian 
temple  and  the  Moorish  mosque  and  the  Gothic 
cathedral  shall  be  cast  aside  in  favor  of  the  Doric 
order. 

My  third  thought  is  an  outcome  of  my  last.  You 
all  know  the  story  of  how  our  early  companies  had 
to  struggle  with  the  popular  prejudice  against  a 
business  which  seemed  to  savor  of  gambling  with 
human  life.  You  remember  how  the  jurist  and 
the  moralist  have  joined  forces  with  the  special 
pleader  in  the  past  to  explain  that  the  gambler  and 
the  underwriter  have  no  common  ground  except  in 
the  mathematical  laws  which  govern  the  operations 
of  both.  You  know,  too,  that  the  controversy  is 
not  yet  dead,  but  that  insurance  plans  and  policy 
forms  that  savor  of  speculations  are  often  con- 
demned as  detracting  from  the  purity  and  lowering 
the  morality  of  the  life  insurance  jDrinciple.  I  am 
no  advocate  of  gambling,  but  I  believe  that  deep 
down  in  human  nature  is  the  gambling  instinct, 
finding  in  the  uncertainties  of  the  outcome  an 
added  zest  both  to  business  and  pleasure,  and  that 
to  do  away  with  speculation  would  destroy  all 
social  and  economic  progress.  The  greatest  curse 
perhaps  that  could  be  inflicted  on  humanity  would 
be  a  revelation  of  the  future,  deadening  the  hopes 


140 

and  blighting  the  expectations  which  now  rest  in 
ignorance.  I  know  no  reason  why  within  proper 
limits  this  instinct  should  not  be  utilized  to  make 
life  insurance  attractive.  If  forms  of  policy  which 
unite  the  element  of  speculation  in  proper  subor- 
dination will  appeal  to  a  class  whom  life  insurance 
in  its  purity  would  fail  to  attract,  why  should  they 
not  be  won  as  our  fathers  built  their  churches  and 
their  roads,  by  appealing  to  the  universal  gambling 
instinct  ?  Some  years  ago  I  was  called  on  to  op- 
pose a  most  nefarious  bill  aimed  at  the  life  insur- 
ance interests.  On  the  legislative  committee 
having  it  in  charge  was  one  who  was  reckoned  the 
prince  of  the  gambling  fraternity  in  his  State.  I 
looked  on  him  as  our  worst  opijonent ;  but  he 
listened  with  increasing  interest  as  our  story  went 
on — gradually  the  light  dawned  on  him.  ' '  Why, 
gentlemen,  your  business  is  a  gamble,  but  you  are 
playing  fair  and  I  am  with  you."  And  he  proved 
the  staunchest  friend  we  had  in  that  whole  legis- 
lature. We  had  appealed  successfully  to  his 
gambling  instinct. 

We  often  find  a  healthy  corrective  for  the  arti- 
ficial conditions  which  surround  us,  in  comparing 
our  views  with  those  which  have  prevailed  in 
earlier  times.  No  man  has  stood  higher  among 
the  early  writers  on  life  insurance  than  Augustus 
De  Morgan ;  in  his  essay  on  probabilities  he  dis- 


141 

cusses  the  nature  of  an  insurance  office,  about 
which  there  were  very  imperfect  conceptions  even 
by  the  courts.  To  the  mind  of  this  prince  of  Eng- 
lish mathematicians,  the  germ  of  the  insurance 
company  was  the  savings  bank,  and  the  office  itself 
was  but  an  adaptation  of  the  banking  system  to 
the  equalization  of  the  interests  of  the  depositors. 
We  have  but  to  impose  on  depositors  a  covenant 
that  each  shall  proportionately  contribute  during 
life,  that  the  deposits  shall  remain  untouched  add- 
ing interest  on  interest  until  all  are  dead  and  then 
a  pro  rata  distribution  be  made,  and  we  have  to  all 
intents  and  purposes  an  old  line  life  company. 
This  was  De  Morgan's  conception  of  the  insurance 
office,  a  modified  bank.  We  on  the  contrary  have 
dissected  the  business  and  are  disposed  to  look  on 
the  bank  as  a  foreign  attachment  brought  in  in  the 
effort  to  modify  the  simple  insurance  office.  To 
him  the  business  was  an  entirety.  To  many  of  us 
it  is  a  legitimate  insurance  plus  an  accumulation 
annex  whose  functions  and  legitimacy  are  bones  of 
contention. 

Again,  I  am  not  seeking  to  undervalue  the  im- 
portance of  analysis,  but  I  believe  that  the  busi- 
ness should  be  studied  as  a  complex  and  vitalized 
unity  rather  than  as  an  artificial  union  of  diverse 
complexities,  and  that  the  full  idea  of  our  insur- 
ance office  as  to  its  plans  and  methods  is   only 


142 

realized  when  we  approach  the  subject  as  did  De 
Morgan,  from  a  communistic  stand-point,  and  look 
on  it  as  a  practical  device  for  sharing  accumula- 
tions. I  will  make  but  one  more  point  in  this  con- 
nection— the  limitations  of  our  existing  life  insur- 
ance plans.  We  have  exercised  untold  ingenuity 
in  adapting  the  benefits  to  the  varied  wants  of  the 
applicants  ;  but  our  adaptation  of  the  costs  to  their 
varied  conditions  has  been  restricted  to  narrow 
limits.  Practically  we  have  but  one  standard 
measure  of  cost  for  the  general  life  office,  the  nor- 
mal mortality  of  healthy  entrance  according  to 
age.  That  this  is  a  very  imperfect  measure  all 
must  admit.  No  industrial  office  would  dream  of 
basing  its  premiums  on  an  ordinary  table  without  a 
loading  that  would  supply  the  deficiency.  Every 
company  knows  that  next  to  age,  the  occupation 
of  its  healthy  members  is  the  most  important  ele- 
ment in  their  risks.  If  our  business  was  like  that 
of  almost  every  other  known  branch  of  insurance,  a 
matter  of  annual  or  short  term  risks,  I  believe  that 
the  defect,  if  we  may  call  it  so,  would  have  been  cor- 
rected long  ago,  and  the  applicant  would  have  been 
judged  just  as  the  accident  underwriter  judges  his 
applicants,  or  even  as  the  fire  underwriter  judges 
of  his  buildings,  on  their  own  individual  merits. 
But  because  the  life  insurance  is  sui  generis^  be- 
cause it  is  a  unity  running  for  long  years  or  for 


143 

life,  with  every  element  entering  into  the  risk 
subject  to  change,  except  that  of  death,  and  be- 
cause the  terms  must  all  be  settled  at  the  start 
and  sure  provision  be  made  for  a  distant  and  un- 
certain future,  we  have  the  anomaly  of  this  great 
branch  of  insurance  ignoring  every  element  of  the 
hazard  but  one  in  the  formulation  of  its  plans. 
The  reserve  element  of  life  insurance  has  thus  far 
constrained  us  to  deal  with  age  as  the  single  factor 
in  the  risk.  Thus  our  seeming  defect  becomes 
rather  a  necessary  limitation,  surrendering  some- 
what of  the  principles  of  equity  to  insure  a  strength 
and  stability  of  vastly  greater  importance.  By 
ignoring  in  our  plans  and  methods  every  element 
of  a  risk  but  that  of  age  we  have  secured  a  degree 
of  certainty  in  our  results,  and  a  simplicity  and 
unity  in  our  plans,  unknown  in  any  other  branch 
of  insurance. 

But  I  question  whether,  with  added  light,  the 
time  may  not  come  when  other  factors  than  that  of 
age  may  be  dealt  with  and  greater  equity  be 
secured  without  the  sacrifice  of  other  elements. 
To-day  our  general  offices,  with  few  exceptions, 
recognize  but  a  single  class  of  applicants,  the 
healthy  lives.  All  that  large  body  in  the  com- 
munity which  makes  up  the  under  average,  and 
the  impaired  who  need  insurance  even  more  than 
the  healthy,  are  barred.     The  ideal  company  is  one 


144 

whose  plans  let  down  the  bars  and,  in  the  language 
of  the  preacher,  make  salvation  free  to  every 
thirsty  souL  In  such  a  company  age  will  be  repre- 
sented by  a  group  of  premiums  which  the  medical 
examiner  must  apply.  This  ideal  office  may  never 
be  anything  but  a  dream,  but  as  a  practical  ques- 
tion it  is  worth  considering  whether  our  existing 
methods  cannot  be  enlarged  in  that  direction. 
When  Professor  Benjamin  Pierce  gave  to  the 
mathematical  world  his  profound  conception  of 
what  he  chose  to  denominate  lineal  associative 
algebra,  a  calculus  in  which  even  the  limitations 
imposed  by  quantity  were  abolished,  and  Hamil- 
ton working  in  an  opposite  direction,  conceived  of 
quaternions,  in  which  new  and  unheard-of  limita- 
tions were  imposed  on  our  familiar  ideas  of  quan- 
tity, both  in  diverging  lines  were  enlarging  our 
conceptions  of  the  ideal  calculus,  and  were  demon- 
strating a  principle  broader  than  mathematics  and 
true  in  life  insurance,  that  the  removal  of  limita- 
tions is  essential  to  the  ideal  fullness  and  perfec- 
tion of  the  scheme,  while  the  imposition  of  needed 
limitations  may  broaden  its  practical  usefulness 
and  scope. 

I  shall  close  with  a  brief  reference  to  the  second 
division  of  our  topic,  the  question  of  reserves.  As 
some  of  you  know,  I  was  requested,  as  a  delegate  to 
the  recent  international  congress  of  actuaries  at  Lon- 


145 

don,  to  discuss  the  limitations  of  the  net  valuation 
system,  a  subject  which  had  been  originally  chosen 
by  Mr.  Sheppard  Homans.  That  discussion  led 
straight  up  to  the  question  what  reserve  should  be 
exacted  of  a  life  insurance  company.  I  shall  con- 
fine myself  here  to  a  single  phase  of  that  ques- 
tion. We  all  know  that  business  conditions  have 
radically  changed  in  recent  years ;  that  with  the 
growth  of  competition  and  wealth,  liberal  expendi- 
tures on  narrow  profit  margins  have  become  a  gen- 
eral law  of  trade.  It  seems  to  me  idle  to  expect 
that  life  insurance  should  be  an  exception  to  the 
law.  I  regard  the  demand  that  a  progressive  com- 
pany should  write  new  business  without  techni- 
cally loaning  the  credit  of  its  older  members,  and 
should  put  up  first  year's  premiums  out  of  first 
year's  reserves,  as  a  quixotic  dream.  I  will  cite  a 
single  illustration  that  I  there  used,  the  case  of 
industrial  insurance  in  which  commissions  are  com- 
muted by  the  purchase  outright  of  the  business 
from  the  agent ;  and,  so  far  from  being  able  to  put 
up  first  year's  reserves,  several  years  must  elapse 
before  a  consolidated  debit  will  enable  the  com- 
pany to  make  itself  whole  on  its  investment.  The 
whole  theory  of  this  business  is  opposed  to  our 
popular  views  regarding  the  procuring  of  new  mem- 
bers at  the  temporary  cost  of  the  old,  but  will  any 
one  question  its  soundness  ?    It  is  a  necessary  con- 


146 

comitant  of  the  only  conditions  under  which  indus- 
trial insurance  can  be  done.  It  rests  on  two  as- 
sumptions, that  a  going  company  must  have  new 
business,  and  the  members  as  a  body  will  profit  in 
the  end  from  the  investment.  I  know  of  no  reason 
why  these  same  principles  should  be  illegitimate 
when  applied  to  ordinary  insurance  on  the  mutual 
plan.  The  simple  questions  are,  does  the  company 
need  the  business,  and  can  it  profitably  advance 
the  cost  of  procuring  it  ? 

I  do  not  think  these  questions  are  fully  answered 
when  we  have  simply  determined  whether  new 
business  will  reduce  the  dividends  of  existing 
members.  Suppose  it  could  be  conclusively  shown 
that  every  existing  policy-holder  would  receive 
larger  dividends  if  no  new  members  were  added 
and  the  surplus  was  all  divided  among  those  who 
remain ;  would  that  justify  a  complete  abandon- 
ment of  new  business  and  the  ultimate  winding  up 
of  the  company  ?  I  conceive  that  a  life  insurance 
oflBice  is  something  more  than  the  mere  property  of 
those  who  may  claim  at  any  time  to  be  its  mem- 
bers ;  that  it  was  chartered  and  intended  to  be  a 
permanent  economic  institution  for  the  benefit  of 
those  who  may  hereafter  join,  as  well  as  for  those 
who  may  now  chance  to  hold  its  contracts,  and  as 
such  is  obligated  to  perpetuate  its  own  existence. 
If  I  am  correct  in  this,  and  business  conditions 


147 

have  so  shaped  themselves  that  new  membership 
involves  a  loan  of  funds  to  make  good  a  technical 
demand  for  first  year's  reserves,  it  would  seem 
plain  either  that  the  loan  should  be  made  or  that 
the  demand  for  such  reserve  should  be  modified 
when  safety  and  equity  will  permit. 

Valuation  in  any  form  is  but  a  means  to  an  end  ; 
there  is  no  one  prescribed  method  which  is  superior 
to  another  for  all  purposes.  The  questions  of  sol- 
vency and  equity  which  it  is  employed  to  deter- 
mine, can  sometimes  be  more  completely  answered 
by  one  method  and  sometimes  by  another.  So  long 
as  substantial  equity  and  solvency  are  not  en- 
dangered there  is  every  reason  why  our  existing 
methods  of  valuation  should  be  modified  to  meet 
the  requirements  of  the  business.  Dr.  Sprague, 
the  leading  actuary  of  Great  Britain,  both  in  vari- 
ous papers  before  the  British  Institute  and  before 
the  International  Congress  at  Brussels,  has  advo- 
cated a  method  of  valuation  which  should  allow  for 
the  expenses  of  the  first  year's  business.  Mr. 
Homans,  in  the  last  named  Congress,  proposed  a 
formula  by  which  the  usual  net  valuation  should  be 
applied  only  after  the  first  year,  and  I  further  ex- 
tended that  formula  at  London  to  succeeding  years, 
thus  distributing  the  expenses  as  in  industrial  in- 
surance over  a  wider  range. 

But  there  is  a  simpler  method  of  reaching  that 


148 

same  result  under  our  existing  laws  and  one  which 
has  of  late  been  growing  in  favor,  that  of  making 
first  year's  business  term  insurance  by  the  contract 
itself.  This  may  seem  to  some  like  beating  the 
Devil  around  the  stump,  but  the  question  of  its 
propriety  in  my  mind  rests  simply  on  the  question 
whether  the  practical  necessities  of  the  business  as 
they  exist  to-day,  demand  it.  The  theory  of  our 
usual  valuation  method  ignores  the  cost  of  new 
business ;  but  it  exists  as  a  stubborn  fact,  giving 
the  lie  to  our  theory  and  demanding  recognition. 
"While  other  causes  were  at  work,  the  chief  cause 
of  the  universal  slaughter  of  small  companies  which 
took  place  about  25  years  ago  was  the  legal  require- 
ment of  a  reserve  in  the  first  year  of  the  policy  ' ' 
says  Mr.  McClintock. 

Gentlemen,  these  random  remarks  are  not  with- 
out a  certain  coherence  in  emphasizing  the  vital 
unity  of  this  business.  I  am  not  seeking  to  assail 
popular  views,  nor  in  directing  your  attention  to 
the  personal  element  which  enters  into  every  proper 
estimate  of  life  insurance  plans,  am  I  disputing  the 
fact  that  no  personal  ability  can  make  amends  for 
wrong  plans  and  methods.  I  am  putting  in  a  plea 
for  flexibility  rather  than  rigidity  in  the  applica- 
tion of  the  rules  by  which  those  plans  are  judged. 
I  am  urging  the  importance  after  all  our  analytic 
work  has  been  done  of  co-ordinating  the  parts  and 


149 

judging  of  our  institution  as  a  synthetic  whole. 
The  true  test  of  a  company,  no  matter  how  perfect 
in  theory,  must  be  the  practical  workings  of  its 
system,  and  those  practical  workings  must  depend 
upon  the  master  minds  in  control. 

When  nearly  30  years  ago  that  great  fire  in  a 
neighboring  city  brought  ruin  to  the  doors  of  so 
many  American  offices,  one  great  company,  though 
denuded  of  its  resources,  was  prompt  to  proclaim 
that  every  loss  should  be  paid  in  full,  and  its  repre- 
sentatives were  boldly  sent  from  claimant  to  claim- 
ant adjusting  its  liabilities  and  merely  extending 
the  time  of  final  settlement.  Others  followed  in  its 
footsteps.  By  every  rule  of  bookkeeping  those 
companies  were  financial  wrecks.  But  most  valu- 
able of  their  assets  were  their  splendid  reputations 
and  the  men  behind  who  had  helped  to  create  them 
and  were  directing  their  affairs.  In  the  hands  of 
those  men  their  franchises  were  their  working  capi- 
tal. The  plans  that  they  so  boldly  inaugurated 
were  not  down  in  the  books,  but  the  planners  fore- 
saw the  outcome.  Public  confidence  in  those  offices 
rose  higher  than  ever  before,  new  premiums  poured 
in  like  a  flood,  and  every  payment  was  met.  Like 
some  veteran  chess  player  they  had  sacrificed  their 
queen  to  save  a  check-mate,  and  had  won  a  masterly 
position.  This  is  what  I  mean  by  the  vital  element 
that  inheres  in  life  insurance  plans. 


150 

The  world  owes  much  to  those  subtle  intellects 
who  have  analyzed  our  mental  processes  and  have 
explored  the  mysteries  of  our  concepts,  our  judg- 
ments, our  emotions  and  our  wills,  but  to  the  true 
philosopher  it  is  the  one  living  mind  which  thinks 
and  feels  and  wills,  as  occasion  may  require. 

Life  insurance  is  more  than  a  private  enterprise. 
Like  the  work  of  the  common  carrier  it  may  be 
said  to  be  impressed  with  a  public  trust.  The  State 
has  not  granted  chartered  rights  to  be  exercised  for 
the  selfish  benefit  of  any  single,  passing  genera- 
tion, but  that  those  which  may  follow  may  share 
its  benefits  in  such  varying  forms  as  the  changing 
needs  of  the  public  may  demand.  Utility,  safety, 
equity,  persistence  ;  these  are  the  central  features 
of  every  true  life  office,  towards  which  all  its  plans, 
no  matter  how  diverse,  must  lead. 

You,  gentlemen,  have  assembled  as  State  officials, 
with  a  programme  drawn  up  in  the  line  of  your 
familiar  duties,  as  analyzers  and  investigators  of 
life  insurance  management,  but  I  have  ventured  to 
emphasize  the  controlling  thought  which  directs 
alike  the  rhetorician,  the  painter,  the  sculptor  and 
the  architect,  the  essential  unity  and  vitality  of 
their  finished  work. 


SPECIAL   FEATURES,   DIVIDENDS,   SUR- 
RENDER VALUES,  ET  CAETERA. 

JACOB  L.  GREENE  : 

1D0  not  propose  a  teclinical  discussion  of  the 
formulae  by  which  the  assumptions  on  which 
premiums  and  reserves  are  founded  may  be  recon- 
ciled to  experience  and  to  varying  administrative 
treatment  of  the  commercial  elements  of  life  in- 
surance as  a  business;  but  rather  to  deal  briefly 
with  the  clear  and  unvarying  principles  which 
must  govern  any  such  attempt,  unless  something 
else  than  principle  is  to  govern.  When  we  put 
numbers  for  things  and,  positing  them  at  will  or 
at  the  dictation  of  shifting  circumstance,  deal 
with  the  numbers  according  to  their  own  laws  of 
combination,  mere  mathematical  morality  is  quite 
apt  to  put  itself  at  the  fore  and  cast  a  cross  light 
on  the  relations  of  things.  The  discussion  of  fun- 
damental principles  is  nevpr  unprofitable.  A  clear, 
seeing  look  at  the  plain  truth  of  things  in  their 


152 

natural  arrangement  never  fails  to  correct  and 
confirm  our  grip  on  duty  in  our  administration  of 
it. 

The  first  item  of  the  subject  assigned  me  implies 
that  its  included  topics  are  to  be  treated  from  the 
point  of  view  of  mutual  life  insurance.  They  are 
the  details  of  the  adjustment  of  the  necessary 
assumptions  of  things  uncertain  to  the  after  ascer- 
tained certainty.  They  are  the  after  correction  of 
assumptions  of  experience  by  the  application  of 
the  facts  themselves  when  they  have  been  made 
known  by  actual  experience.  The  assumptions 
approximate  facts  sufficiently  to  allow  the  under- 
taking involving  them  to  be  begun  ;  the  function 
of  the  special  feature  is  to  import  the  actual  facts 
backward,  and  substitute  them  for  the  assiimption, 
making  the  undertaking  entirely  veracious.  Black- 
stone  says  that  Equity  is  the  correction  of  that 
wherein  the  law  by  reason  of  its  universality  is 
deficient.  The  assumptions  on  which  our  compu- 
tations rest,  being  only  assumptions,  are  necessarily 
the  universal  and  undeviating  ;  by  special  features 
we  transform  the  universal  assumption,  to  which 
yesterday,  to-day  and  to-morrow  are  all  alike,  into 
the  particular  present  fact,  and  make  it  do  equity 
to  yesterday  and  to-day,  and  to  the  deviations  of 
each  varying  to-morrow  when  it  shall  have  lapsed 
from  the  prophetic  into  the  historic  era.     The  ideal 


153 

of  mutual  life  insurance  is  contained  in  our  as- 
sumptions only  as  is  the  perfect  statue  in  the 
rough  chipped  outlines  of  the  half -wrought  marble  ; 
the  special  features  should  supply  the  workman- 
ship by  which  the  completed  beauty  of  the  artist's 
conception  stands  perfectly  revealed. 

The  test  of  the  special  feature  is  therefore  its 
integrity  ;  that  it  be  the  true  incidental  of  the 
imperfect  fundamental,  and  the  necessarily  im- 
plied corrective  and  supplement  of  its  imperfec- 
tions ;  that  it  be  not  arbitrary  and  factitious,  but 
the  natural,  self-contained  means  whereby  the  im- 
perfect assumptions  are  made  to  realize  their  ideal, 
the  perfect  truth  of  intention  in  the  scheme  into 
which  they  are  built. 

To  find  the  truth  of  the  incidental,  or,  as  it  is 
here  called,  the  special  features,  we  must  therefore 
look  straightly  at  the  nature,  intention,  and  de- 
fects of  the  fundamental :  what  is  it  for ;  what 
does  it  i)ropose  to  do  ;  what  relations  does  it  seek 
to  establish,  between  whom,  for  what  reasons,  to 
what  end,  and  how  determined  ?  For  these  are 
the  things  in  which  the  incidental  must  help  out, 
correct  and  perfect  the  fundamental,  or  else  it  is 
false,  and  is  no  longer  incident  to  the  fundamental, 
but  becomes  an  arbitrary  and  wholly  unrelated 
element,  thrust  into  or  parasitically  imposed  upon 
it  for  some  special  purpose  foreign  to  the  funda- 


154 

mental  intention,  which  is  so  far  nullified  and 
therefore  perverted. 

And  let  us  first  note  one  great,  comprehensive, 
oft-forgotten  fact ;  all  human  enterprises  deal  ap- 
parently with  or  through  things  ;  the  things  dealt 
with  are  always  in  sight,  always  being  handled, 
and  to  superficial  view  are  the  essential  matters  in 
transaction.  But  in  reality  it  is  not  the  things 
handled  which  are  the  true  subject  matter  dealt 
with  ;  it  is  the  human  relations  to  those  things :  it 
is,  on  the  one  hand,  the  human  needs  of  the  things, 
and,  on  the  other,  the  human  efforts  to  produce, 
provide,  and  supply  them  to  those  needs  ;  it  is  the 
human  rights  and  relations  which  grow  out  of 
all  these  needs  and  these  resultant  efforts  directed 
toward  their  relief :  it  is  humanity  itself  in  its 
constant  and  universal  interaction  of  need  and 
service  that  is  the  subject  matter  of  all  our  efforts 
and  enterprises.  It  is  not  the  ponderables  of  trade 
that  are  of  its  essence :  it  is  the  service  of  human 
needs ;  it  is  not  the  things  weighed,  measured, 
noted,  tabulated,  combined,  and  shifted  in  cun- 
ningly devised  equation ;  it  is  living  flesh  and 
blood,  in  its  hoping,  fearing,  laboring,  loving, 
suffering  personal  units. 

Here,  then,  let  us  ^k  our  point  of  view.  What 
is  mutuality  in  life  insurance ;  what  does  it  pro- 
pose to  do ;  for  whom  ;  and  how  ;  and  why  is  its 


155 

method  built  up  to  carry  and  apply  to  its  clientele 
the  principle  of  mutuality  and  to  realize  it  for 
their  benefit ;  and  is  the  benefit  a  gratuity  and  of 
whose  grace,  or  a  right  and  by  what  title  ;  what 
part  in  its  purpose  and  necessary  to  its  perfection 
can  the  incidental  or  special  feature  effect ;  what 
is  the  necessity  for  any  features  whatever  outside 
its  technical  elements  ;  what  defects  inhere  in  the 
application  of  these,  and  what  is  of  the  essence  of 
their  correction  ? 

Mutual  life  insurance  sees  these  things  ;  the  pro- 
ductiveness of  the  life  of  the  husband  and  father  of 
a  family ;  the  dependence  of  the  family  on  that 
life  ;  the  uncertainty  of  its  duration  ;  the  material 
calamity  involved  in  its  loss  ;  the  constant  hazard 
of  its  loss  resting  on  the  dependent  family  ;  the  in- 
ability both  of  the  life  and  of  the  family  to  defend 
against  it ;  their  consequent  need  of  protection 
against  it  by  the  transfer  of  the  financial  hazard  to 
some  one  always  and  adequately  prepared  to  meet 
it ;  the  imperative  duty  of  the  husband  and  father 
to  procure  that  protection  for  the  family  which  he 
has  created  in  helpless  dependence  on  himself,  and 
seeing  these  things,  it  comes  with  an  eye  single  to 
his  help,  appealing  to  his  conscience  and  therefore 
pledging  its  conscience  to  deal  with  him  in  truth 
and  equity.  Setting  before  him  his  family's  need, 
his  duty  and  his  insuflicient  ability,  and  its  own 


156 

sufficient  ability,  it  demands  of  him  to  put  his 
family  and  himself  into  its  hands  ;  •  that  he  give  to 
it  his  means,  that  it  may  therefor  give  to  them  the 
maximum  of  protection  due  them  from  him,  but 
beyond  his  personal  power.  Life  insurance  deals 
solely  with  the  duty  of  a  man  to  his  family.  It 
proposes  itself  to  him  and  to  them  as  his  proxy 
therein  because  it  is  the  only  entirely  reliable  and 
sufficient  doer  of  that  duty.  That  is  the  reason  of 
its  being,  the  inspiration  of  its  motive,  its  own  sin- 
gular function,  the  ground  of  its  morality  and  the 
test  of  integrity  in  its  every  method.  It  is  to  deal 
with  the  family,  remembering  that  it  has  put  itself 
in  the  father's  place  ;  it  is  to  deal  with  him,  re- 
membering that  it  has  persuaded  him  to  confide  to 
it  this  his  supreme  duty  and  therefore  its  supreme 
trust ;  that  therefore  it  must  come  to  the  most 
effective  possible  help  of  each  and  every  man 
whose  duty  it  has  assumed  ;  to  help  him,  and  not 
to  trick  him  through  any  of  his  limitations  whether 
of  knowledge  or  of  ability. 

Mutuality  is  imported  into  the  operative  methods 
of  this  great  scheme  in  order  to  give  to  the  expen- 
diture of  the  husband  and  father  the  greatest  pos- 
sible effect  for  the  protection  of  his  family :  to 
make  each  member  pay  to  the  company  only  the 
actual  current  cost  of  his  risk  to  it,  in  order  that 
each  dollar  he  does  pay  may  give  the  greatest  pos- 


157 

sible  amount  of  protection  :  in  order  to  give  to  tlie 
attempted  performance  of  his  duty  the  highest  pos- 
sible efficiency.  Because  of  the  greatness  of  the 
family's  need  and  because  of  the  limited  ability  of 
the  husband  and  father  to  meet  it,  mutuality 
comes  as  an  unselfish  philanthropy  and  promises 
to  do  the  business  at  bare  individual  cost. 

The  fundamental  thing  in  mutual  life  insurance 
is  therefore  not  the  materials  with  which  it  works, 
which  its  technics  weave  into  operative  methods, 
but  the  human  relationships  to  which  it  addresses 
itself ;  the  human  duties  which  it  assumes  for 
others,  the  disinterested  help  therein  which  it  pro- 
poses, and  the  rights  which  it  thereby  gives  to 
others. 

From  this  standpoint  let  us  take  our  material  and 
deal  with  it  in  the  morality  of  such  a  conception. 

The  problem  of  life  insurance  is  to  give  with  cer- 
tainty, to  a  proper  beneficiary,  an  agreed  sum  of 
money  on  the  failure  of  a  certain  life,  for  which 
undertaking  it  must  receive  an  adequate  premium. 
The  first  question  in  the  matter  is  the  adequacy  of 
the  premium,  the  elements  of  which  can  never  be 
precisely  measured  beforehand.  Mortality,  ex- 
pense, and  interest  are  constantly  variable  factors  ; 
their  variations  are  incajjable  of  previous  demon- 
stration ;  administrative  control  over  them  is 
limited. 


168 

In  the  absence  of  exact  foreknowledge,  with  the 
certainty  of  variable  experience  and  that  no  group 
of  experiences  will  precisely  reproduce  any  former 
group,  we  can  use  as  elements  of  our  premium  cal- 
culations only  that  general  knowledge  of  the  in- 
cluded facts  which  is  the  average  of  their  observed 
history.  We  assume  that  this  history  will  repeat 
itself  substantially  and  subject  to  those  modifying 
causes  only  verbose  operation  we  can  foresee  and 
measure  within  a  safe  margin  for  which  we  can 
make  sufficient  allowance.  But  since  allowance 
for  continual  and  uncertain  fluctuations  must  be 
made,  we  can  secure  absolute  certainty  only  by  an 
excess  of  caution  in  our  assumptions  ;  we  must  be 
reasonably  sure  that  we  are  somewhat  overcharg- 
ing, or  we  are  not  reasonably  sure  that  we  are 
charging  enough.  Thus  life  insurance  solves  its 
problem  of  certainty  by  bringing  into  its  uncer- 
tainty an  admitted  overbalancing  error  whose  ex- 
act determination  and  proper  correction  must  be 
left  to  experience.  The  continuous  problem  of 
mutuality  is  the  continuous  correction  of  that 
constantly  operative  error  and  the  detailed  adjust- 
ment of  the  correction  to  the  individual  payments 
of  the  membership. 

The  reason  and  intent  of  mutuality  in  life  insur- 
ance are  rooted  in  the  appeal  to  conscience  and  the 
offer  of  assistance  in  duty.     Pleading  the  family's 


159 

need  and  the  father's  inability,  and  offering  its 
service  to  solve  the  dilemma  as  far  as  possible,  it 
sets  itself  to  do  equity  :  equity  to  those  for  whom 
it  pleads,  and  equity  to  him  whom  it  rouses  to 
conscientious  action  in  their  behalf.  As  it  calls 
him  to  unselfishness,  it  must  be  itself  unselfish, 
with  an  eye  single  to  the  benefit  both  of  its  wards 
and  its  co-contractor.  It  proposes,  as  its  peculiar 
part  in  giving  his  family  their  protection,  to  make 
him  pay  only  its  actual  cost,  without  profit  to  any- 
one at  his  expense,  and,  compelled  to  guess,  how- 
ever intelligently  and  closely,  what  that  cost  will 
be,  and  to  stipulate  for  too  high  a  premium  in  con- 
sequence of  its  inability  to  do  otherwise  than 
guess,  the  primary  problem  in  equity  and  good 
conscience  toward  him  is  the  constant  ascertain- 
ment of  the  actual  current  cost  of  the  insurance 
and  the  as  constant  correction  of  the  deliberate 
overcharge.  That  is  what  mutuality  is  for  :  to  give 
to  each  member  his  insurance  at  its  exact  cost  to 
the  whole  membership.  What  in  a  stock  company 
would  be  annual  profits  for  the  stockholders,  is 
annually  to  go  back  to  the  members  of  the  mutual 
company  in  order  that  they  may  in  reality  pay  only 
what  their  several  risks  have  cost ;  and  mutuality 
between  the  members  is  accomplished  when  and 
only  when  each  individual  member  is  made  to  pay 
just  his  ratable  share  of  that  cost  proportioned  to 


160 

his  risk  :  his  actual  ratable  share  in  the  losses  and 
expenses  incurred  and  in  the  necessary  reserve. 
This  is  accomplished  by  so-called  dividends.  A 
dividend  system  which  accomplishes  this  is  a  true 
one  ;  a  dividend  system  which  fails  in  this  is  false 
to  the  principle  of  mutuality,  and,  in  a  professedly 
mutual  company,  becomes  an  instrument  of  ex- 
ploitation of  some  of  the  members  for  the  advan- 
tage of  some  other  of  them,  putting  the  favored 
ones,  so  far,  essentially  in  the  relation  of  stock- 
holders with  the  privilege  of  making  a  profit  out 
of  the  rest,  and  so  utterly  destroying  the  mutual 
relation  and  making  it  a  snare  to  the  unwary. 

A  dividend  system  which  is  true  to  the  purpose 
of  mutuality,  which  makes  it  a  fact  and  not  a  false 
flag,  must  put  each  member  at  the  end  of  the  year 
in  the  same  position  as  to  his  premium  payments 
that  he  would  have  been  at  the  beginning  of  the 
year  had  exact  foreknowledge  been  possible.  If 
we  knew  exactly  what  mortality,  expenses  and 
interest  are  to  be,  we  should  know  to  a  cent  what 
the  yearly  premium  must  be  ;  we  should  exact  only 
that,  and  the  problem  of  mutuality  as  related  to 
cost  would  be  eliminated.  As  these  things  are  of 
annually  changing  experience  and  can  be  known 
only  at  the  end  of  each  year,  only  at  that  time  can 
we  know  what  was  the  exact  and  necessary  pre- 
mium for  that  year.     Then  we  do  know.     Mutu- 


161 

ality  has  promised  to  take  only  that  exact  and 
necessary  premium  ;  to  take  from  each  only  his 
exact  share  of  the  whole  cost ;  which  can  be  accom- 
plished only  by  returning  to  the  member  at  the 
end  of  the  year  the  sum  by  which  the  assumed  or 
nominal  premium  paid  is  proved  to  have  exceeded 
the  exact  premium  necessary  to  meet  his  share 
of  the  year's  experience  in  the  several  elements 
of  cost. 

There  is  one  qualification  to  be  put  upon  what 
has  been  said.  There  are  abundant  and  controlling 
practical  reasons  why  a  company  should  never 
divide  its  entire  surplus :  why  it  should  always 
have  on  hand  something  more  than  the  equivalent 
of  its  exact  liabilities  :  why  it  should  have  a  fund 
over  and  above  these,  which  efficiently  serves  both 
a  protecting  and  a  steadying  purpose  in  the  satis- 
factory administration  of  affairs,  and  each  one's 
share  in  which  may  safely  and  fairly  be  left  to  be 
paid  with  his  policy  at  maturity,  having  meantime 
served  him  and  the  whole  membership  alike.  But 
the  undoubted  practical  value  of  such  a  temporary 
and  comparatively  small  accumulation  of  undi- 
vided surplus  in  no  wise  negatives  in  any  point 
the  propositions  here  made. 

In  form,  the  dividend  problem  is  the  determina- 
tion of  each  one's  share  of  a  total  yenrly  over-pay- 
ment.    In  fact,  it  is  essentially  a  determination  of 


162 

each  one's  share  of  a  total  yearly  cost.  This  is  the 
true  view-point ;  mutuality  promises  actual  cost. 
It  deals  with  a  constantly  changing  yearly  cost. 

In  detail,  the  operation  is  the  ascertainment  of 
the  actual  mortality,  the  actual  expenses,  and  the 
actual  rate  of  interest  earned,  and  the  apportion- 
ment of  that  mortality  and  tl^ose  expenses  to  each 
member,  and  the  appropriation  to  each  of  his  share 
in  the  surplus  interest,  proportioned  to  his  con- 
tribution to  the  reserve. 

That  this  should  be  done  every  year,  unless  for 
some  reason  affecting  solvency  and  requiring  a 
suspension  of  normal  procedure,  is  an  obvious 
matter  of  course,  since  only  so  can  mutuality  be 
effected ;  and  there  would  be  no  need  to  assert  or 
defend  the  propriety  and  necessity  of  annual  divi- 
dends in  a  well-established  mutual  company,  did 
not  professedly  mutual  companies  assert  and  prac- 
tice the  contrary,  for  reasons  growing  out  of  abnor- 
mal conditions  of  their  own  creation. 

An  annual  premium  is  constructed  and  is  paid 
to  cover  an  always  changing  annual  cost ;  that  is, 
annual  mortality,  annual  expenses,  and  the  annual 
contribution  to  reserve.  These  things  are,  and 
must  be,  annually  determined  after  the  fact ;  and, 
being  so  determined,  there  is  no  reason,  in  the 
nature  of  things,  why  the  known  annual  overplus 
of   an  annual  premium  should   not    be  at  once 


163 

returned ;  and  only  so  can  the  mutual  policy- 
holder  have  his  insurance  at  its  constant,  actual, 
annual  cost,  which  is  the  very  pith  and  substance 
of  mutuality. 

But  in  many  companies  the  early  cost  of  busi- 
ness has  been  allowed  to  largely  outrun  the  pro- 
vision for  expenses  contained  in  the  premium  ;  so 
largely  that  for  several  years  the  excess  of  expense 
over  that  provision  swallows  up  any  saving  from 
mortality  and  any  interest  gain ;  indeed,  it  swal- 
lows up  the  portion  which  should  go  to  reserve, 
and  so  there  is  no  saving  made  and  no  interest 
earned,  and  the  money  paid  by  older  members  has 
to  furnish  the  reserve  for  the  new. 

Under  such  conditions,  where  in  many  instances 
the  cost  of  the  business  and  the  cost  of  the  risk 
are  allowed  to  far  exceed  the  premiums  collected 
for  several  years,  there  can  be  no  overplus  for  divi- 
sion for  a  long  time  ;  and  when  any  does  begin  to 
accrue,  it  will  be  relatively  small.  It  is  this  situa- 
tion which  has  developed  the  several  forms  of 
'^ Postponed  Dividend"  schemes,  all  of  which 
have  before  them  a  three- fold  problem  :  (a)  to 
reconcile  the  membership  to  the  postponement  of 
a  dividend  until  there  is  something  to  divide  ;  (b) 
the  concealment  of  the  relatively  small  amount  of 
surplus  legitimately  accruing,  which  is  attempted 
by  limiting  the  number  among  whom  division  is  to 


164 

be  made  to  those  only  who  shall  survive  the  period 
of  postponement  and  keep  their  policies  in  force  ; 
and  by  forfeiting  to  the  surplus  any  overplus  that 
has  accrued  on  all  policies  ceased  meantime, 
whether  by  death  or  lapse,  together  with  a  con- 
siderable part,  and  in  some  cases  all,  of  the  reserve 
on  lapsed  policies  ;  (c)  the  maintenance,  in  all  this, 
of  some  shadow  of  mutuality.  It  was  hoped — and 
the  lapses  of  these  companies  in  the  past  justified 
the  hope — that  the  deficiency  of  surplus  caused  by 
a  high  expense  account  would  be  largely  replaced, 
and  thus  concealed,  by  the  many  forfeitures  ;  that 
the  consequent  dividends  to  the  few  who  remained 
to  get  them  would  be  so  large  as  to  simulate,  and 
even  apparently  exceed;  the  results  of  a  prudent 
but  really  mutual  management ;  and  that  the 
chance  of  sharing  in  the  forfeitures  of  others 
would  blind  the  eyes  of  the  many  to  the  utter 
reversal  of  mutuality  which  these  schemes  per- 
petrate. 

It  would  be  exceedingly  interesting,  did  time  per- 
mit, to  review  in  detail  the  failure  of  these  schemes 
to  realize  their  prophesied  results.  The  vice  of 
extravagance  which  caused  their  invention  has 
grown  by  what  it  has  been  fed  upon  ;  and  only  in 
one  point  has  it  met  expectation  ;  the  hope  of  shar- 
ing other  people's  forfeits  has  been  a  much  stronger 
bait  for  business  and  for  agents  than  simple,  clean 


165 

mutuality  conjoined  to  sober,  humdrum  prudence  ; 
and  those  who  have  rested  their  faith  and  based 
their  offers  of  service  to  the  public  on  these  undy- 
ing but  familiar  and  rather  uninteresting  verities 
have  had  to  fight  for  life.  They  would  find  no 
fault,  however,  either  with  their  position  or  their 
chosen  task,  were  not  the  things  they  fight  against, 
and  which  traverse  every  principle  and  destroy 
every  result  of  mutuality,  done  by  professedly 
mutual  companies  in  the  name  of  mutuality ;  the 
mutuality  of  the  shearers  and  the  shorn. 

In  this  connection,  but  under  the  ''^ et  caetera^'' 
head  of  my  subject,  I  must  note  another  outgrowth 
of  progressive  extravagance,  intended  to  legitimate 
that  extravagance  and  to  incorporate  it  into  the 
very  structure  of  the  legal  standard  of  solvency 
and  of  presumptive  sound  practice,  and  to  help  out 
the  failures  of  the  "  postponed  dividend  "  schemes. 
I  refer  to  the  growing  practice  of  so  framing  a 
policy  contract  that  the  annual  premium  for  the 
first  year  is  treated,  not  as  the  first  of  a  series  of 
like  payments,  but  as  an  one-year,  stock-rate,  term 
premium  only,  calling  therefore  for  no  reserve  at 
the  end  of  the  year,  and  thus  allowing,  or  rather 
offering  that  entire  premium  to  be  used  up  for  ex- 
penses, without  anything  expected  of  it  for  either 
reserve  or  surplus.  No  franker  confession  could 
be  made  of  the  extent  to  which  the  expense  of 


166 

management  has  been  allowed  to  go,  nor  of  the 
grip  it  has  got  on  the  managements  which  adopt 
the  device.  And  it  carries  on  its  face  that  eternal 
and  world-wide  distinction  between  a  true  practice 
which  is  self-limiting  and  self-protecting,  and 
therefore  conservative,  and  a  false  practice  which 
is  a  concession  to  a  vice.  There  is  no  principle  of 
self-limitation  in  it.  If  a  vicious  competition  has 
called  for  one  premium  to  be  given  up  to  its  con- 
sumption, and  demanded  a  reconstruction  of  the 
contract  and  its  treatment,  the  way  has  been  shown 
and  set  wide  open  for  it  to  call  for  all  that  ambi- 
tion may  require,  and  to  demand  that  the  whole 
future  of  life  insurance  shall  be  founded,  legally 
and  practically,  upon  the  tossing  seas  of  competi- 
tion, and  established  upon  the  floods  of  a  growing 
expense  account,  under  exigencies  of  a  competi- 
tion whose  severity  will  never  relax  toward  those 
who  forever  yield.  As  one  of  the  accomplished  ad- 
vocates of  this  scheme  has  said,  "  the  only  limit  to 
it  is  what  the  public  will  stand."  Unfortunately 
for  the  cause  of  public  enlightenment,  the  average 
Yankee  business  man  hates  to  make  public  confes- 
sion that  he  has  been  **done"  ;  and  prefers  to  let 
his  innocent  neighbor  get  the  taste  of  the  fruit  of 
the  tree  of  knowledge  by  eating  it  himself.  Mean- 
time  those  who  will  not,  follow  in  this  train  must 
t  such  sober  joy  as  they  can  out  of  the  firmly- 


167 

held  fact  that  the  truth  remains  always  true.     De- 
vices to  evade  it  simply  prove  it  true. 

SUKRENDER  VALUES. 

When  we  come  to  consider  the  matter  of  surren- 
der values  from  the  point  of  view  of  mutuality,  we 
meet  a  situation  involving  opposing  elements.  The 
company  has  agreed  for  a  certain  premium  to  carry 
the  policy  for  the  lifetime  of  the  insured  or  for  a 
definite  term  of  years,  and,  the  premium  being 
paid,  it  has  ordinarily  no  option  of  discontinuance. 
Its  calculations  rest,  and  must  rest,  on  the  theory 
of  the  continuance  both  of  its  risks  and  of  its 
premium  income  to  their  normal  term.  But  it  pro- 
tects its  theory  by  no  contract  to  that  effect  from 
the  insured.  He  is  free  to  pay  or  stop  paying,  re- 
gardless of  his  family's  need  on  the  one  hand,  or 
his  ability  on  the  other.  For  any  reason  he  stops. 
What  considerations  of  duty  should  govern  the 
company  in  its  treatment  of  the  case  ?  To  whom 
now  does  it  owe  duty  ;  and,  if  to  more  than  one 
person  or  group  of  persons,  upon  what  several  in- 
terests of  these  is  this  duty  grounded ;  by  what 
divergence  of  these  interests  or  by  what  conflict 
between  them  is  duty  toward  one  or  the  other  of 
them  controlled  or  modified ;  which  group  is  en- 
titled to  have  its  interests  fii'st  considered  ? 

There   can  be  no   question  that  the  company's 


168 

first  duty  is  to  those  to  whom  it  remains  under 
contract  obligation — its  continuing  policy-holders. 
It  is  first  to  consider  how  they  are  affected  by  a 
withdrawal  of  one  of  their  number  ;  how  the  sure 
basis  of  its  operations,  the  solvency  of  its  contracts, 
and  the  future  cost  of  their  administration  stand 
affected.  The  elements  of  the  problem  are  definite  ; 
the  determination  of  their  weight,  the  measure- 
ment of  their  operative  force,  is  somewhat  a  matter 
of  varying  circumstances. 

The  effect  of  withdrawals  is  in  three  directions  : 
They  reduce  numbers,  thus  narrowing  the  basis  for 
averages,  increasing  the  range  of  fluctuation,  in- 
tensifying its  effect  and  prejudicing  steadiness  of 
operation  ;  they  presumably  take  out  not  only  un- 
impaired lives,  but  the  best  lives,  at  least  those 
having  the  strongest  unconscious  instinct  of  an 
enduring  vitality ;  while  this  may  not  be  and  is 
not  always  the  case  under  ordinary  conditions  in- 
viting continued  confidence,  it  would  be  unsafe  to 
predicate  any  treatment  of  them  upon  any  other 
assumption  which  there  is  no  after  opportunity  of 
rectifying,  an  assumption  which  would  be  realized 
to  an  appalling  degree  under  conditions  which 
impaired  confidence  in  corporate  integrity ;  and, 
thirdly,  surrenders  for  cash  interfere,  and  may 
conceivably  very  seriously  interfere,  with  that  em- 
ployment of  the  funds  of  the  membership  which  is 


169 

of  the  essence  of  financial  stability  and  a  most  im- 
portant factor  in  the  reduction  of  current  cost  to 
continuing  members. 

On  the  other  hand,  it  is  to  be  borne  in  mind  that 
in  withdrawing  the  past  member  has  exercised  an 
unforbidden  power,  and  that  during  his  member- 
ship he  has  not  only  paid  the  current  cost  of  his 
risk,  but  has  also  been  making  annual  contribu- 
tions to  the  reserve  for  the  purpose  of  protecting 
the  company  against  the  future  of  his  risk  :  a  part 
of  his  increasing  share  in  a  future  greater  mortal- 
ity contributed  now  because  he  is  in  theory  ex- 
pected to  remain  to  share  it  without  paying  a  cor- 
respondingly greater  future  premium.  Against  the 
greater  future  risk  on  his  life  as  age  increases  the 
company  has  been  laying  aside  each  year  a  com- 
pensating sum  out  of  a  level  premium.  And  now 
that  future  risk  is  eliminated  by  his  termination  of 
what  was,  at  his  option,  and  in  the  company's  an- 
ticipation, a  lifelong  contract.  The  company  is 
relieved  of  all  liability  for  that  future  risk  against 
which  it  has  been  reserving  a  sum  from  each  pre- 
mium paid. 

The  question  now  is  :  What  in  all-round  equity 
— equity  to  him  who  has  relieved  the  company  of 
further  liability,  and  equity  to  his  associates  from 
whom  he  has  withdrawn  the  supporting  vital 
and  financial  strength  of  his  membership— shall  be 


170 

done  with  this  man?  How  shall  these  dual  ele- 
ments of  a  situation  which  the  company  has  left  it 
in  his  power  to  create  be  held  in  just  and  true 
balance  ? 

In  general  terms,  the  answer  is  and  must  be  : 
Do  that  which  at  once  recognizes  fully  his  free  and 
legitimate  right  of  withdrawal  and  the  termination 
of  the  liability,  but  also  that  which  is  thoroughly 
conservative  of  every  right  interest  of  the  member^ 
ship  from  which  he  has  withdrawn  his  support,  of 
every  interest,  that  is,  which  he,  while  a  member, 
had  in  common  with  the  rest. 

If  the  withdrawal  of  members  at  any  time,  at 
discretion,  did  not  affect  the  vital  basis  and  there- 
fore the  sureness  and  steadiness  of  the  company's 
operations,  and  did  not  so  tend  to  introduce  violent 
and  dangerous  fluctuations  ;  and  did  not  such  with- 
drawals also  tend  to  disturb  and,  under  clearly 
probable  conditions,  to  very  seriously  disturb  those 
lines  of  financial  management  which  the  greatest 
good  of  the  whole  membership  necessarily  pre-sup- 
poses ;  and  did  not  the  duty  of  men  to  protect 
their  families,  which  is  the  whole  ground  and  aim 
of  our  proffered  service  to  men  and  the  reason 
for  our  existence,  remain  always  the  paramount 
fact  and  our  primary  point  of  view,  and  the  one 
which  should  govern  our  treatment  of  every  detail, 
and  which  gives  to  us  the  same  plea  to  urge  upon 


171 

the  old  member  for  his  continuance  that  we  use  in 
soliciting  new  members,  and  also  lays  upon  us  the 
duty  to  do  what  we  justly  and  fairly  can  to  see 
that  those  families  which  have  been  once  committed 
to  our  care  and  sure  protection  are  not  lightly  and 
easily  exposed  again  to  danger  through  any  prac- 
tice of  ours,  there  would  be  no  problem  in  the  mat- 
ter. We  could  freely  give  the  departing  member 
everything  left  from  his  past  transactions  with  us. 
But  every  one  of  these  propositions  must  be  taken 
in  the  negative  and  taken  seriously.  The  member- 
ship is  the  company,  and  the  withdrawal  of  mem- 
bers narrows  the  basis  of  operation,  and  so  widens 
the  range  and  intensity  of  fluctuation,  and  may  be 
carried  so  far  as  to  be  destructive  of  a  company's 
integrity.  The  company' s  investments  are  of  funds 
held  for  a  future  ;  they  must  be  made  with  a  view 
to  that  future,  and  therefore  of  a  character  very 
different  from  those  adapted  to  meet  sudden  and 
uncertain  demands  for  which  instantly  and  certain- 
ly available  resources  must  be  always  in  readiness. 
The  scheme  of  life  insurance  proposes  that  its 
invested  reserves  shall  be  drawn  upon  only  accord- 
ing to  the  foreknown  and  measurable  operation  of 
the  law  of  mortality.  The  right  of  members  to 
withdraw  at  any  time,  taking  their  contributions 
to  reserve  in  cash;  negatives  the  whole  scheme,  ex- 
poses the  fund  to  be  drawn  upon  at  will,  the  draft 


172 

upon  it  being,  both  in  time  and  amount,  dependent 
upon  elements  of  motive  which  are  unforeseen  and 
incalculable,  and  of  whose  future  operation  nothing 
is  known  except  that  they  exist,  that  they  may  be 
brought  into  great  and  most  critical  intensity  of 
operation  at  any  time  by  a  variety  of  causes,  and 
that  they  are  uncontrollable  by  the  company  and 
have  absolute  free  play  against  it.  There  is  no  de- 
fense against  them  except  the  blind  hope  that  they 
may  never  operate. 

The  right  of  free  surrenders  for  cash  inverts  the 
theory  and  the  only  consistent,  logical,  and  safe 
practice  in  life  insurance,  by  making  the  reserve 
consist  in  effect  of  a  mere  group  of  individual  de- 
posits, subject  to  check  at  least  once  a  year ,  and 
this  feature  of  uncertain  and  precarious  continu- 
ance of  the  insurance  factor  and  of  the  right  of 
withdrawal  of  invested  funds,  becomes  at  once  the 
dominant  feature  of  the  company's  affairs  and  is 
the  ultimate  contingency  to  be  kept  always  in  view 
in  every  matter.  The  company,  in  effect,  is  no 
longer  a  life  insurance  company,  treating  all  its 
affairs  on  a  true  life  insurance  basis,  with  with- 
drawal as  a  mere  incident,  subordinate  in  every  re- 
spect to  the  integrity  of  its  insurance  operations, 
but  a  pseudo  bank  of  deposit,  liable  to  have  all  its 
funds  withdrawn  in  any  year,  needing  therefore  to 
have  its  investments  immediately  convertible  into 


173 

cash  without  loss,  while  yet  upon  these  funds  are 
founded  the  presumably  lifelong  contracts  for 
whose  prosperous  administration  an  entirely  differ- 
ent theory  of  investment  is  essential  and  for  the 
management  of  which  a  bank  is  utterly  unfit. 

So  long  as  a  company  is  rapidly  growing  and  the 
average  of  its  lives  is  still  at  a  young  age,  and  it 
has  not  reached  that  maturity  necessary  to  com- 
plete its  exposure  to  all  the  vicissitudes  of  mortu- 
ary and  business  experience,  and  its  credit  has 
escaped  attack,  the  practical  danger  of  these  sub- 
verting factors  will  be  at  a  minimum  and  their 
operation  partly  concealed,  and  hope  may  dwell  in 
a  fool's  paradise.  But  the  condition  of  growth  is 
not  an  eternal  one,  no  matter  what  energy,  under 
what  stimulus,  be  applied.  To  every  company  will 
come,  ought  to  come,  in  time  the  condition  when 
no  pressure  can  make  its  inflow  of  new  business  ex- 
ceed its  outflow,  and  when  its  true  normal  will  be 
a  stable  equilibrium  in  amount  at  risk,  in  assets, 
income,  and  outgo. 

Consider  a  company  in  such  a  case — whether 
large  or  small  does  not  signify— meeting  those  gen- 
eral business  conditions  which  cause  most  men  to 
take  command  of  all  available  cash  resources,  with 
a  membership  which  has  been  educated  to  regard 
their  policies  as  tickets  for  cash  practically  on  de- 
mand, and  who  have  taken  them  in  such  a  company 


174 

because  they  were  so  available,  who  were  willing  to 
protect  their  families  so  long  as  they  did  not  want 
to  use  the  money  themselves,  but  who,  not  having 
been  educated  to  put  family  protection  above  every 
other  interest  and  duty,  would  take  that  protection 
only  where  it  would  not  interfere  with  their  free  use 
of  the  money  when  they  wanted  it,  and  what  may 
that  company  reasonably,  inevitably  expect?  It 
will  suffer  a  withdrawal  of  its  members  propor- 
tioned to  the  intensity  of  financial  difficulty  and 
pressure ;  in  severe  times  a  very  great  number, 
greatly  reducing  its  vitality  basis,  certainly  taking 
out  its  best  and  leaving  its  worst  lives,  and  raising 
its  mortality,  and  requiring  the  conversion  of  its 
best  investments  into  cash  at  a  most  unfavorable 
moment  for  their  sale,  in  order  to  enable  it  to  pay 
out  large  sums  to  its  outgoing  members,  thus  de- 
stroying its  own  credit  and  furnishing  strong  rea- 
son to  every  sound  life  to  get  out. 

The  danger  is  an  absolute,  immeasurable,  and 
most  critical  one.  It  has  not  yet  appeared  in  full 
measure  among  American  companies  because  few, 
if  any,  of  those  which  are  certainly  exposed  to  its 
malign  operation  have  yet  reached  the  static  con- 
dition which  will  leave  no  practical  defense  against 
its  effects.  But  the  conditions  for  a  disastrous  ex- 
perience somewhere  in  the  future  are  being  fully 
prepared  in  many  companies.  The  annual  privilege 


175 

of  surrender  for  cash  is  now  presented  as  a  prime 
attraction  ;  the  bulk  of  the  business  is  already  ex- 
posed to  be  swept  away  by  its  exercise.  The  per- 
manency of  corporate  life  and  uniformity  of  opera- 
tion which  are  absolutely  essential  to  the  under- 
takings of  a  life  insurance  company,  are  put  com- 
pletely at  the  caprice  of  members  secured  by  an 
appeal  to  selfish  interest,  not  to  unselfish,  para- 
mount duty.  In  order  to  get  new  members  the 
more  easily,  they  are  given  unqualified  power 
to  wipe  a  company  out  of  existence  in  any  one 
year. 

To  do  justice  to  the  membership  which  remains, 
to  protect  the  corporate  life  and  integrity  against 
capricious  self-destruction  or  corrupt  or  malicious 
assault,  to  still  give  the  family  of  him  who  with- 
draws of  real  necessity  some  remaining  measure  of 
that  protection  which  is  our  function  and  their 
greatest  need  and  greatest  when  it  cannot  be  longer 
paid  for,  and  yet  to  fully  and  equitably  recognize 
all  that  is  due  to  the  departing  member  whose 
future  claim  has  lapsed,  the  only  true,  completely 
effective  and  safe  method  is  to  give  paid-up  insur- 
ance for  the  surrendered  policy,  for  its  unexpired 
term.  This  retains  the  member,  minimizes  the 
vital  loss  and  the  narrowing  effect  of  withdrawal, 
and  prevents  disturbance  for  the  advantage  to  one, 
of  the  investments  made  for  the  common  and  equal 


176 

benefit.  Any  other  treatment  of  a  withdrawing 
member  ought  to  be  rare  and  exceptional  and 
governed  in  its  detail  by  those  special  and  rare 
circumstances  which  may  rightfully  constitute  the 
exception  for  the  individual  as  against  the  safety, 
profit,  and  general  good  of  all  the  rest. 

In  a  word,  cash  surrender  values  are  false  in 
principle,  constantly  destructive  in  tendency,  ex- 
pensive as  calling  for  a  maximum  replacement  of 
lost  business,  and  dangerous  to  every  operation  by 
which  a  company  proceeds  to  the  fulfillment  of  its 
insurance  obligations. 

Concerning  a  proper  surrender  charge  I  wish  to 
say  only  this  :  where  paid-up  insurance  is  given  on 
a  lapsing  policy,  the  charge  should  have  regard  to 
the  probable  vitality  loss  on  the  amount  of  risk 
surrendered,  and  to  the  cost  of  replacing  it  by  new 
memberships.  These  are  variable  elements,  especi- 
ally the  latter.  In  the  case  of  cash  surrenders 
there  is  need  of  an  additional  charge  in  the  nature 
of  a  safety  fund  or  insurance  against  the  destruc- 
tion of  the  company  or  its  reduction  to  perilous 
conditions  by  the  free  employment  of  the  malign 
privilege.  How  much  that  part  of  the  charge 
ought  to  be  we  have  no  means  of  knowing.  We 
have  only  just  got  the  conditions  fairly  set  up  for 
the  future  experience  which  will  throw  light  on 
the  matter.     Some  have  already  gone  far  enough 


177 

to  know  that  the  danger  is  not  imaginary  and  is 
something  more  than  theoretical. 

LOANS   ON   POLICIES. 

Akin  to  the  annual  cash  surrender  value  in  its  de- 
structive effect  both  upon  the  company's  stability 
and  existence  and  upon  the  protection  of  the  fam- 
ily, is  the  loan  to  the  insured  of  the  reserve  upon 
his  policy.  Its  sole  virtue  in  comparison  is  that 
it  does  not  at  once  and  irrevocably  destroy  all  the 
family's  insurance,  and  leaves  open  the  possibility 
of  its  restoration  by  the  repayment  of  the  loan 
But  if  it  staves  off  the  day  of  cash  surrender  it 
goes  much  more  than  half  way  toward  it.  It  gives 
the  cash,  leaves  the  full  premium  to  be  paid  upon 
a  reduced  amount  of  insurance  while  the  loan 
runs,  and  adds  to  the  unreduced  cost  of  a  reduced 
insurance  the  interest  on  the  loan.  And,  like  the 
annual  cash  value,  it  has  the  abhorrent  vice  of 
teaching  a  man  to  consider  himself  first  and  his 
family  last.  Both  in  its  suggestiveness  and  in  the 
pressure  of  its  conditions,  it  leads  strongly  toward 
lapse  ;  and  it  is  small  wonder  that  so  few  loans  are 
paid  and  so  many  lapses  ensue. 

I  am  aware — none  better — that  I  have  spoken  to 
you,  gentlemen  commissioners,  against  an  almost 
overwhelming  drift  of  practices  indulged  in,  not 
because  they  truly  develop  or  conserve   correct 


178 

principles,  but  because  they  make  it  easy,  for  the 
moment,  instead  of  hard,  to  get  business  ;  because 
in  place  of  unselfish,  persistent  self-sacrificing 
duty,  they  present  self-interest  and  a  speculation  ; 
not  because  upon  them  one  may  build  in  assured 
soundness  from  the  bottom  up,  but  because  one 
may  thereby  build  rapidly  and  brilliantly,  leaving 
to  future  storms  the  revelation  of  rock  or  sand 
in  the  foundations  of  these  houses  of  hope  for 
the  families  of  our  land.  And  I  have  so  spoken 
to  you  because  as  the  recognized  and  lawful  guar- 
dians of  the  immeasurable  public  interest  in  these 
things,  as  those  who  are  presumed  and  bound  to 
know  the  true  and  to  discriminate  it  from  the  spe- 
cious, it  is  in  your  power  tq  create  a  public  intelli- 
gence, a  public  opinion,  and  a  public  conscience 
which  will  not  always  see  the  truth  denied  nor 
made  of  non  effect. 


JOHN  B.  LUNGER 


SPECIAL   FEATURES,  ETC. 


The  first  part  of  this  title  offers  the  oppor- 
tunity of  discussing  a  wide  range  of  topics,  but 
I  shall   endeavor  to   avoid  its  temptations,   and 


179 

confine  myself  chieliy  to  the  special  features  which 
have  been  introduced  into  policy  contracts  during 
recent  years,  and  to  some  of  the  advantages  which 
have  accrued  therefrom. 

AN    AMERICAN    CHARACTERISTIC. 

It  is  one  of  the  characteristics  of  the  American 
that  when  he  takes  up  a  fresh  line  of  research  or  a 
new  pursuit  he  is  prone  to  concentrate  his  energies 
upon  the  particular  subject  which  happens  to  en- 
gage his  attention  until  he  has  exhausted  its  every 
useful  possibility  or  developed  it  to  such  an  extent 
that  it  seems  incapable  of  further  improvement. 
It  is  to  this  national  characteristic  that  we  owe 
much  of  our  success  as  a  people  in  practical  pur- 
suits, invention,  commerce  and  war.  For  the  past 
ten  years  the  architects  of  life  insurance  have 
been  exhibiting  this  national  characteristic  in  the 
development  of  special  features  in  policy  con- 
tracts. To  such  an  extent  has  this  tendency  been 
carried  that  the  good  old-fashioned  forms  of  life 
and  endowment  policies  appear  to  be  struggling 
for  an  existence  amidst  a  mass  of  consols,  deben- 
tures, bonds  and  income  policies. 

BASIS    OF    NEW    FORMS. 

These  new  forms  of  policies  are  generally  pro- 
duced by  combining  with  the  simpler  forms  of 


180 

life  and  endowment  policies  a  deferred  annuity- 
element  guaranteeing  to  the  intsured  after  a  speci- 
fied period  of  years,  or  to  a  beneficiary  on  the 
death  of  the  insured,  an  attractive  income — usu- 
ally, but  improperly,  called  interest — upon  the 
principal  sum  of  the  policy.  In  some  instances  an 
attempt  is  made  to  enhance  the  value  of  the  policy 
by  paying  the  income  through  a  trust  company  or 
by  attaching  negotiable  coupons  to  the  policy. 
While  the  spirit  of  life  insurance  is  keenly  in 
sympathy  with  features  intended  to  provide  for 
old  age  or  to  guard  the  iinal  effectiveness  of  the 
proceeds  of  a  policy,  care  should  be  exercised  in 
drafting  contracts  intended  to  subserve  such  excel- 
lent purposes  to  include  only  such  benefits  as  are 
within  the  legitimate  scope  of  the  business.  If  an 
income  (interest)  is  to  be  paid  after  the  maturity  of 
tl^e  policy,  the  rate  assumed  should  be  kept  within 
the  rate  which  the  company  makes  use  of  in  com- 
puting its  policy  liabilities,  and  the  payments 
should  be  made  direct  to  the  insured  or  to  the 
beneficiary.  If  the  rate  is  made  to  appear  larger 
than  can  be  earned  on  a  safe  investment,  or  the 
deferred  annuity  element  is  merely  a  subterfuge  to 
secure  an  extra  loading  on  the  premium,  the  policy 
is  liable  to  become  an  instrument  of  deception. 

The  expediency  of  issuing  policies  with  negotia- 
ble interest  coupons  is  seriously  open  to  question. 


181 

It  should  always  be  borne  in  mind  that  the  func- 
tion of  life  insurance  is  to  protect  the  family  and 
to  provide  for  adversity  or  old  age  ;  not  to  furnish 
securities  to  be  bought  and  sold  in  the  open  mar- 
ket or  passed  from  hand  to  hand,  like  railroad 
stocks  or  bonds.  It  is  to  be  hoped  that  this  par- 
ticular feature  will  soon  be  numbered  among  the 
things  of  the  past. 

We  might  properly  take  exception  to  certain 
other  of  these  basal  features,  but  in  the  main  the 
tendency  has  been  in  the  right  direction,  and  out 
of  the  many  innovations  advantages  will  accrue 
which  will  prove  of  lasting  benefit  to  the  business. 

INSTALMENT   AND    TRUST    FORMS. 

There  are  no  statistics  upon  which  to  base  an 
estimate  of  the  losses  incurred  through  unwise 
investment  of  the  sums  paid  to  beneficiaries  as 
death- claims,  but  when  one  observes  how  very  few 
have  solved  the  problem  of  investing  even  small 
sums  beyond  risk  of  loss,  it  is  not  surprising  that 
the  officers  of  life  insurance  companies  should  feel 
great  concern  regarding  the  preservation  of  the 
sums  paid  to  beneficiaries,  especially  when  it  is 
considered  that  such  payments  often  constitute 
the  only  provision  which  the  insured  has  been 
able  to  make  for  those  dependent  upon  him.  We 
should  welcome,  therefore,  any  feature  which  will 


182 

protect  the  insurance  after  the  death  of  the  policy- 
holder and  serve  to  safeguard  the  purposes  for 
which  the  insurance  was  taken.  The  plan  of  pay- 
ing policy-moneys  in  instalments  is  so  in  keeping 
with  this  thought  that  it  is  worthy  of  special  men- 
tion and  commendation.  There  are  two  ways  in 
which  instalment  policies  are  made  payable.  The 
first  form  limits  the  payments  to  a  specified  period 
of  years,  generally  10,  15  or  20,  and  the  second 
form,  which  is  by  far  the  more  preferable,  provides 
for  at  least  twenty  annual  payments,  and  if  the 
beneficiary  is  living  at  the  end  of  this  period,  the 
payments  are  continued  during  the  remainder  of 
life.  This  latter  method  of  payment  is  embodied 
in  what  is  known  as  the  continuous  instalment 
policy,  and  when  that  policy  is  so  drawn  that  the 
instalments  cannot  be  assigned  or  commuted  dur- 
ing the  life  of  the  beneficiary,  it  constitutes  to  my 
mind  the  ideal  form  of  protective  life  insurance. 

One  of  the  prominent  companies  safeguards  its 
insurance  in  another  way.  It  will,  at  the  request 
of  the  insured,  attach  to  its  policy  a  certificate,  in 
which  the  insured  may  define  his  wishes  as  to  the 
disposition  of  his  policy.  Generally  a  beneficiary 
is  named  to  whom  a  stated  income  is  paid  as  long 
as  the  proceeds  of  the  policy  will  permit.  Interest 
is  allowed  upon  the  fund  remaining  in  the  hands 
of  the  company,  at  a  rate  of  about  one-half  of 


183 

one  per  cent,  less  than  the  rate  the  company 
earns  npon  its  investments.  The  proceeds  of  a 
policy  to  which  this  certificate  is  attached  become 
a  trust  fund  which  is  administered  strictly  in  ac- 
cordance with  the  wishes  of  the  person  by  whom 
the  trust  was  established.  The  payments  made 
are  free  from  taxation  and  all  other  charges. 

I  would  venture  to  predict,  as  one  of  the  out- 
comes of  the  present  tendency  amongst  men  of 
wealth  to  place  their  estates  in  trust,  that  a  consid- 
erable number  of  the  policies  written  in  the  future 
for  large  amounts  will  include  either  the  instal- 
ment, or  the  trust  features  which  have  just  been 
described. 

OPTIONAL   SETTLEMENTS. 

Among  the  special  features  wisely  developed  in 
recent  years  under  the  non -forfeiting  tontine  or 
accumulation  policy,  is  the  privilege  given  the 
insured  of  making  a  choice  among  various  methods 
of  settlement  at  the  end  of  the  first  dividend 
period.  This  feature  has  added  greatly  to  the 
popularity  of  the  form  of  insurance  mentioned. 
The  insured  is  no  longer  confined  to  one  of  two 
alternatives :  (a)  remain  in  the  company  and 
take  insurance,  {b)  get  out  and  take  cash  (often 
with  a  large  discount) ;  nor  is  he  obliged  to  decide 
at  the  inception  of  his  insurance  what  disposition 


184 

he  will  make  of  his  policy  at  the  end  of  the  first 
dividend  period.  At  least  three  options  are  always 
given,  namely,  the  privilege  of  withdrawing  in 
cash  the  entire  proceeds  of  the  policy,  consisting  of 
the  reserve  and  the  accumulated  dividend  ;  or  of 
applying  the  proceeds  to  purchase  paid-up  insur- 
ance at  net  rates  ;  or  to  purchase  an  annuity. 
When  the  form  of  insurance  permits,  these  three 
options  are  supplemented  by  others,  which  consists 
of  combinations  of  cash  and  insurance,  insurance 
and  an  annuity,  annuity  and  cash,  and  so  on  ;  the 
options  as  a  whole  being  so  comprehensive  that  at 
the  end  of  the  dividend  period  the  insured  may  ad- 
just his  policy  to  suit  his  then  condition  of  life. 

TABLES   OF   SURRENDER  VALUES. 

The  practice  of  writing  surrender  values  in  dol- 
lars and  cents  in  the  policy,  instead  of  merely  giv- 
ing the  rule  by  which  such  values  will  be  calcu- 
lated, is  helping  to  dissipate  the  idea  that  life  in- 
surance contracts  are  full  of  technicalities  and  pit- 
falls. It  is  to  be  regretted  that  some  of  our  lead- 
ing companies  hesitate  to  adopt  this  practice,  and 
for  no  other  reason,  apparently,  than  that  it  in- 
creases the  liability  to  error  in  writing  the  policy, 
and  puts  them  to  a  slight  extra  expense.  Errors 
can  be  avoided  by  the  proper  checks,  and  the  ex- 
pense will  be  met  many  times  over  by  the  diminu- 


^    Of    THE 

UNIVERSITY 

OF 


185 


tion  in  lapses,  which  is  the  invariable  result  of  a 
clear  and  liberal  policy.  So  far  as  I  am  informed, 
the  first  serious  mistake  in  writing  these  tables  has 
yet  to  occur.  It  is  to  be  hoped  that  this  feature 
will  extend  until  all  life  insurance  policies  are  so 
explicit  that  inability  to  read  will  be  the  only  ex- 
cuse that  can  be  given  for  a  failure  to  comprehend 
them  in  all  their  details. 

CASH   LOAI^S. 

The  embodiment  of  cash  loan  privileges  in  policy 
contracts  may  be  regarded  as  one  of  the  most  im- 
portant new  features  in  life  insurance.  The  right 
of  the  insured  to  an  equity  in  the  reserve  on  his 
policy,  finds,  in  my  judgment,  its  best  recognition 
in  the  granting  of  loans  at  stated  times  upon  rea- 
sonable terms  and  conditions.  How  often  is  it  no- 
ticed that  when  the  holder  of  a  policy  finds  himself 
in  trouble  he  hastens  to  apply  for  the  cash  value  of 
his  policy,  although  it  is  evident  that  at  such  a  time 
life  insurance  is  an  urgent  necessity  and  should  not 
be  abandoned  without  careful  consideration.  How 
much  better  for  all  concerned  if  the  desired  relief  can 
be  gained  without  the  entire  sacrifice  of  that  which, 
in  the  event  of  death  of  the  insured,  may  stand 
between  those  depending  upon  him  and  peaury. 
The  officers  of  companies  granting  cash  loans  will 
undoubtedly  certify  that  in  the  panicky  times  of 


186 

1893-94,  the  relief  given  through  loans  on  policies 
saved  many  thousands  of  policy-holders  from  seri- 
ous financial  trouble,  while  enabling  them  to  con- 
tinue the  much  needed  insurance,  and  those  bene- 
fited on  their  part  will,  no  doubt,  gladly  testify  to 
their  appreciation  of  a  plan  which  confers  such  im- 
portant and  timely  advantages.  In  granting  cash 
loans  it  is  the  practice  in  some  companies  to  allow 
the  loan  upon  application,  without  regard  to  the 
continuance  of  the  payment  of  the  premium  on  the 
policy.  This  practice  is  open  to  some  of  the  objec- 
tions that  may  be  urged  against  cash  surrender 
values.  It  is  better  to  require  that  the  premium 
for  the  ensuing  insurance  year  shall  be  paid  in  ad- 
vance, basing  the  loan  upon  the  reserve  in  that 
year.  By  this  plan  the  insured  always  secures  a 
year,  at  least,  in  which  to  free  himself  from  his 
financial  difficulties  and  to  make  provision  for  the 
payment  of  the  ensuing  premium  on  his  policy. 

The  premium  lien  note  is  but  a  modified  form  of 
the  cash  loan,  and  its  use  is  to  be  encouraged  when 
the  financial  difficulties  of  the  insured  affect  only 
his  power  of  paying  his  current  premium.  These 
notes  are  commonly  drawn  as  a  permanent  lien  on 
the  policy,  payable  at  the  convenience  of  the 
insured.  This  convenient  time,  as  is  the  case  with 
most  matters  relating  to  life  insurance  when  left  to 
the  discretion  of  the  insured,  is  apt  to  seldom  ar- 


187 

rive,  and  the  notes,  therefore,  generally  become  a 
permanent  incumbrance  on  the  policy.  It  has  often 
occurred  to  me  that  if  these  notes  could  be  drawn 
after  the  style  of  an  ordinary  note  of  hand,  and 
made  payable  at  the  end  of  a  stated  period  at  a 
national  bank,  that  a  large  percentage  of  them 
would  be  paid  in  cash.  In  event  of  non-payment 
they  could  be  renewed  for  a  further  period,  pro- 
vided the  policy  was  continued  in  force. 

EETURN   PREMIUMS. 

Among  the  new  features  introduced  during  the 
five  years  succeeding  the  Civil  War  was  the  first 
use  of  the  return-premium  idea  in  this  country. 
Later  it  came  into  much  wider  use,  and  at  the 
present  time  a  considerable  fraction  of  the  life  in- 
surance contracts  issued  are  in  effect  increasing  in- 
surances during  the  first  twenty  years  of  their 
existence,  the  annual  increase  being  equal  to  the 
premium  or  to  some  proportion  thereof.  This  ap- 
pendix to  the  original  contract  has,  in  many  cases, 
been  the  source  of  intense  gratification  to  the  heirs 
of  the  insured.  It  was  Carlyle  who  pointed  out 
that  the  mental  satisfaction  derived  from  any 
newly  received  possession  depends  on  the  ratio  of 
what  we  receive  to  what  we  expected  to  receive. 
How  often  has  it  happened,  in  the  settlement  of 
death-claims  of  policies  which  carried  no  return- 


188 

premium  attachment,  that  the  deduction  of  unpaid 
fractional  premiums  from  the  understood  amount, 
or  in  more  serious  measure  of  loans  which  the  in- 
sured had  obtained  against  the  policy,  has  left  the 
net  result  in  the  minds  of  the  beneficiaries  one  of 
discontent,  and  how  much  more  agreeable  to  all 
concerned  are  such  settlements  when  that  little 
return-premium  attachment  has  provided  the  extra 
amount  which  covers  all  the  company's  claims 
against  the  insurance,  and  still  leaves  to  the  heirs 
some  excess  over  the  nominal  face  of  the  policy. 

UNDER-AVERAGE  RISKS   AND   PLANS. 

Our  business  has  sometimes  been  referred  to  as 
one  of  risks,  chiefly  of  death.  Those  who  are 
familiar  with  the  statistics  know  that  so  long  as 
medical  directors  are  restricted  in  their  selection  of 
lives  by  present  rules  and  traditions,  the  ''risk  of 
death"  may  be  forecast  to  an  almost  absolute  cer- 
tainty, and  that  the  resulting  deaths  will  be  well 
within  the  tabular  limits.  The  stringent  selection 
of  risks  is  chiefly  due,  in  my  opinion,  to  the  pres- 
sure put  upon  the  companies  to  pay  large  divi- 
dends. When  this  pressure  is  reduced,  and  the 
payment  of  dividends  becomes,  as  it  should  be,  a 
subsidiary  feature  of  life  insurance,  the  ratio  of 
mortality  will  be  somewhat  nearer  the  tabular  ex- 
pectation, and  there  will  have  been  a  great  addition 


189 

to  the  usefulness  of  the  business.  In  the  mean- 
time, many  worthy  applicants  and  their  families 
must  suffer  because  existing  conditions  demand 
low  mortality  ratios. 

Until  mortality  becomes  a  more  elastic  factor, 
any  plan  which  will  give  insurance  to  an  under- 
average  risk  ought  to  be  as  welcome  to  the  business 
as  a  breath  of  cool  air  to  a  fevered  patient.  Poli- 
cies on  under-average  lives  have  been  issued  in 
England  for  many  years,  but  the  business  has 
never  assumed  large  proportions.  Several  small 
companies  have  been  formed  in  this  country  for 
the  purpose  of  making  a  specialty  of  this  class  of 
business,  but  those  which  have  not  failed  have 
either  drifted  into  regular  channels  or  are  still  in 
the  experimental  stage.  It  is  only  recently  that 
one  of  the  prominent  American  companies  has 
entered  this  very  promising  field.  That  company 
several  years  ago  formed  a  special  department  for 
the  collection  of  data  pertaining  to  its  declined 
risks.  The  information  obtained  was  classilied, 
and  special  mortality  tables  were  then  computed 
upon  which  that  company  is  now  issuing  policies 
subject  to  liens  or  extra  premium,  or  both,  to  a 
large  percentage  of  applicants  who,  under  former 
conditions,  would  have  been  declined.  Of  all  the 
new  features  in  our  business,  this  one  is  capable  of 
the  largest  development  and  offers  the  best  field 


190 

for  investigation  and  study.  Life  insurance  should 
be  a  broad  business  of  underwriting  any  reasonable 
contingency  of  life  or  death. 

PROMPT  PAYMENT  OF   CLAIMS. 

The  practice  of  paying  claims  promptly,  and  of 
guaranteeing  this  in  the  policy,  has  blown  away 
one  of  the  clouds  that  formerly  cast  its  shadow 
over  life  insurance,  and  may  be  fittingly  deferred 
to  as  a  special  feature.  It  is  neither  delicate  nor 
prudent  to  force  money  on  a  beneficiary  at  a  time 
when  her  mind  is  distracted  by  ^rief,  but  as  soon 
as  proofs  of  death  are  made  out,  both  good  taste 
and  judgment  dictate  that  payment  of  the  claim 
should  not  be  delayed.  '  *  Pay  all  debts  promptly ' ' 
is  as  good  a  maxim  to  follow  in  life  insurance  as 
in  our  private  affairs. 

MINOR    FEATURES. 

There  are  a  number  of  new  features  of  minor  im- 
portance in  ordinary  insurance  that  I  might  refer 
to  if  so  disposed,  but  none  of  them  seem  to  call  for 
special  comment  beyond  that,  they,  together  with 
the  more  important  special  features,  the  elimina- 
tion of  technical  and  objectionable  conditions  and 
the  increase  in  surrender  values,  have  aided  to 
produce  the  policy  of  to-day,  with  its  freedom 


191 

from  restrictions,  its  brevity,  its  clearness  of  state- 
ment, and  its  remarkable  adaptability  to  every 
reasonable  contingency. 

SPECIAL  FEATURES'  IN   INDUSTRIAL   INSURANCE. 

Let  us  now  turn  for  a  moment  to  the  new  features 
in  industrial  insurance.  This  branch  of  the  busi- 
ness, which  has  grown  to  such  magnificent  propor- 
tions and  is  exercising  such  a  beneficent  influence 
in  bettering  the  condition  of  the  poor,  consisted, 
at  the  time  of  its  introduction  into  this  country, 
and  for  some  fifteen  years  thereafter,  of  a  stipulated 
death  benefit  for  a  stated  weekly  premium,  gen- 
erally five  cents  or  a  multiple  thereof.  Up  to  about 
five  years  ago  only  one  company  granted  surrender 
values  or  gave  any  benefit  of  value  beyond  the 
payment  of  the  policy  as  a  death-claim.  During 
the  past  five  years  new  features  have  been  intro- 
duced into  the  policies  and  into  the  practice  of  the 
industrial  companies,  until  it  may  be  said  that  a 
revolution  has  taken  place  in  that  business.  In- 
dustrial insurance  in  this  country  is  practically 
confined  to  three  companies.  One  of  these  com- 
panies grants  cash  values  and  paid-up  insurance 
under  the  Massachusetts  Non-forfeiture  Law  after 
two  years'  premiums  have  been  paid.  Another 
company  grants  paid-up  insurance  after  three  years' 
premiums  have  been  paid,  and  cash  values  at  the 


192 

end  of  the  twentieth  year  of  the  policy's  existence 
and  at  the  end  of  each  fifth  year  thereafter.  The 
third  company  grants  paid-up  insurance  after  ^ve 
years'  premiums  have  been  paid  ;  it  does  not  offer 
cash  surrender  values,  but  will  consider  urgent 
requests  for  cash  values  on  their  merits.  Two 
companies  pay  cash  dividends  on  the  5-year  divi- 
dend plan.  One  company  pays  cash  dividends  at 
the  end  of  the  fifteenth  year  and  each  fifth  year 
thereafter.  It  is  very  suggestive  of  the  disposition 
towards  fair  play  that  obtains  in  these  companies, 
that  the  paid-up  policies  and  cash  values  are 
granted  for  amounts  equally  liberal  with  those 
usually  granted  by  the  ordinary  companies.  It  is 
interesting  to  note  that,  in  the  granting  of  paid-up 
insurance,  one  company  goes  so  far  as  to  notify  the 
owner  of  a  lapsed  policy  entitled  to  paid-up  in- 
surance, of  the  amount  to  which  he  is  entitled  and 
of  the  manner  in  which  the  paid-up  policy  may  be 
obtained. 

It  will  be  seen  from  the  foregoing  that,  in  the  in- 
troduction of  new  features,  those  who  are  responsi- 
ble for  the  management  of  the  industrial  compa- 
nies are  not  one  whit  behind  those  of  their  brethren 
who  deal  with  larger  individual  policies.  I  think 
I  may  safely  assert  that  industrial  insurance,  as 
practiced  in  this  country,  has  arrived  at  that  point 
where  the  one  serious  problem  for  the  companies  to 


193 

solve,  is  to  devise  ways  and  means  of  reducing  ex- 
penses in  order  to  be  able  to  ^ive  a  larger  amount 
of  insurance  for  the  premiums  paid. 


DIVIDENDS. 
TOO  MUCH   STRESS   LAID   ON   DIVIDENDS. 

The  fact  that  most  life  insurance  companies  are 
conducted  on  the  mutual  plan  under  which  all 
profits  revert  to  the  insured,  and  the  desire  of  the 
insured  to  secure  the  largest  possible  returns  for 
the  premiums  paid,  combine  to  make  dividends  and 
the  methods  of  their  distribution  a  subject  of  great 
importance  ;  but  it  does  not  necessarily  follow  that 
so  much  stress  should  be  laid  on  these  features  of 
the  business  as  to  lead  one  not  familiar  with  life 
insurance  to  think  that  payment  of  dividends  is 
the  chief  object  of  the  business.  More  circulars 
were  woven  around,  and  more  arguments  based 
upon,  the  $18,000,000  of  dividends  that  the  com- 
panies paid  out  last  year,  than  upon  the  $80,000,000 
that  were  distributed  in  death-claims  and  endow- 
ments. Agents,  in  soliciting,  fall  into  the  same 
error,  and  discourse  more  eloquently  upon  the  divi- 
dend which  a  particular  policy  will  pay  than  upon 
all  its  other  benefits  combined ;  and  when  two 
agents  meet  in  competition,   one   representing  a 


194 

semi-tontine  company  and  the  other  an  annual 
dividend  company,  many  of  the  intrinsic  merits  of 
life  insurance  are  lost  sight  of  in  the  smoke  that 
arises  from  the  'fiery  arguments  for  and  against 
these  two  methods  of  paying  dividends. 

RECOGNITION   OF   PLANS. 

For  one,  I  heartily  wish  that  all  contention  re- 
garding the  relative  merits  of  the  two  dividend 
plans  could  be  replaced  by  a  courteous  recognition 
of  the  advantages  of  each  system.  The  physician 
does  not  expect  that  every  disciple  of  Esculapius 
will  agree  with  him  in  all  his  views  regarding  nos- 
ology or  materia  medlca^  nor  does  the  lawyer  ex- 
pect that  every  follower  of  Solon  will  agree  with 
him  on  every  question  of  law  or  equity.  Diversity 
of  opinion  stimulates  and  encourages  research. 
There  would  be  little  advance  in  medicine  or  law 
if  the  minds  of  physicians  and  lawyers  ran  in  the 
same  ruts. 

To  be  prosaic,  but  more  to  the  point,  the  mer- 
chants who  print  cotton  cloth,  while  using  the 
same  fabric  as  a  foundation  for  their  goods,  pro- 
duce an  endless  variety  of  colors  and  designs. 
What  would  be  thought  of  one  of  these  merchants 
if  he  insisted  that  every  other  person  engaged  in 
printing  cotton  cloth  should  follow  his  lead  in 
colors  and  designs,  or,  if  he  attempted  to  dictate 


195 

that  the  public  should  wear  the  colors  and  designs 
which  were  most  pleasing  to  himself  personally  ? 
The  sensible  merchant  attends  to  his  own  affairs, 
respects  his  fellow-man,  endeavors  to  keep  in 
touch  with  the  fashions  of  the  day,  and  to  weave 
his  goods  accordingly,  striving  at  the  same  time  by 
new  fabrics  and  designs  to  interest  the  public  in 
his  especial  product. 

While  it  should  be  recognized  that  at  the  found- 
ation of  our  business  there  should  be  principles 
from  which  it  would  be  dangerous  to  deviate,  it  is 
important  that  in  practice  there  should  be  some 
substantial  points  of  variance,  and  that  we  should 
study  the  wishes  and  desires  of  the  public  and 
draft  our  policies  in  keeping  with  the  needs  and 
tastes  of  the  times.  Since  this  is  the  case,  why 
should  not  one  company  make  a  specialty  of  accu- 
mulation dividends,  and  another,  if  it  so  pleases,  of 
annual  dividends?  Admit  this,  and  then  let  the 
advocates  of  each  system  agree  to  respect  the 
opinions  of  those  who  believe  in  the  other,  and 
agree  that  any  difference  of  plan,  while  being  open 
to  debate  at  the  right  time  and  in  the  right  place, 
is  not  a  reason  why  the  motives  and  even  the 
honesty  of  those  who  think  differently  should  be 
questioned.  It  is  a  pity  that  a  business  so  broad, 
so  vast  and  so  dignified  as  life  insurance,  should 
be    sullied    by    such   acrimonious  discussions    of 


196 

dividend  plans  as  we  have  been  obliged  to  listen  to 
in  the  past. 

ANNUAL   DIVIDENDS. 

[n  the  early  days  of  life  insurance,  dividends 
were  computed  by  rule  of  thumb  and  paid  at 
irregular  intervals,  but  afterwards,  with  more 
scientific  methods,  it  became  the  practice  to  pay 
them  annually.  At  that  time  the  business  con- 
sisted almost  entirely  of  life  policies,  and  it  was 
not  the  custom  of  the  companies  to  urge  insurance 
upon  any  ground  other  than  that  of  protection, 
and  it  was  the  aim  of  the  companies  to  furnish  this 
protection  at  the  lowest  net  annual  cost,  it  was 
therefore  fitting,  in  the  then  state  of  the  business 
that  dividends  should  be  declared  annually,  or,  to 
speak  more  strictly,  that  the  overcharge  should 
be  returned  annually. 

In  the  expression  "net  annual  cost"  we  have 
the  principal  argument  for  annual  dividends,  and 
while  the  companies  which  make  a  specialty  of 
paying  dividends  on  this  plan  have  ungrudgingly 
kept  pace  with  the  extension  of,  and  increase  in, 
surrender  values,  they  seem  content  to  go  on  doing 
business  in  a  small  way,  ignoring  the  demands  of 
the  great  mass  of  people,  who,  so  long  as  dividends 
are  to  be  a  feature  of  their  policies,  desire  to  secure 
the  largest  possible  returns.    The  annual  dividend 


197 

companies  have  also  failed  to  appreciate  the  en- 
couragement to  persistency  which  is  one  of  the 
best  results  of  the  semi-tontine  plan,  not  only  to 
the  company,  but  to  all  who  are  concerned  in  any 
way  in  its  affairs.  Neither  do  they  recognize  as 
fully  as  they  should  that  those  who  have  helped 
to  sustain  the  company,  and  to  pay  the  losses  in- 
curred by  the  deaths  of  other  members  during  a 
long  period  of  years,  are  entitled  to  larger  returns 
in  proportion  to  the  premiums  paid  than  those 
whose  connection  with  the  company  has  been  of 
short  duration. 

SEMI-TONTIT^E    OR    ACCUMULATION^    DIVIDENDS. 

It  is  impossible  to  discuss  intelligently  this 
method  of  paying  dividends  without  referring  to 
the  form  of  policy  with  which  the  accumulation 
or  semi-tontine  plan  of  paying  dividends  is  asso- 
ciated, and  of  presenting  briefly  the  conditions 
which  gave  rise  to  the  policy  contract  and  the  in- 
fluence it  has  had  upon  the  business.  When  we 
look  back  to  the  conditions  under  which  life  in- 
surance was  conducted  at  the  end  of  the  first 
twenty  years  of  its  existence  in  this  country,  it  is 
not  suprising  that  we  should  then  find  a  state  of 
affairs  most  unsatisfactory  when  considered  in  the 
light  of  present  knowledge.  Although  there 
were  a  number  of  companies  then  doing  business, 


198 

none  of  them  had  attained  any  great  size  or  ex- 
perience. The  men  controlling  the  companies  had, 
in  most  instances,  been  drafted  from  mercantile 
pursuits  or  from  the  professions.  Both  the  prac- 
tical and  the  scientific  side  of  the  business  were  in 
their  primary  stages.  The  policies  issued  were 
cast-iron  contracts  without  recognition  of  other 
than  the  simplest  equities.  Probably  the  number 
of  men  who  understood  the  principles  or  the  broad 
essentials  of  the  business  could  have  been  num- 
bered on  one's  fingers.  But  there  were  a  few  of 
those  in  responsible  positions  who  were  profiting 
by  experience,  and  young  men  trained  in  the  busi- 
ness and  imbued  with  the  spirit  of  life  insurance 
were  coming  to  the  fore.  There  arose  a  demand  for 
improved  methods  and  more  liberal  practices.  Then 
followed  what  might  fittingly  be  termed  the  Re- 
naissance of  life  insurance  in  this  country.  This 
occupied  about  five  years.  During  this  period 
non -forfeitable  policies  became  a  recognized  feature 
of  the  business,  the  contribution  method  of  divid- 
ing surplus  was  devised,  the  American  Experience 
Table  of  Mortality  was  published,  the  companies 
began  to  issue  short  term  endowment  policies,  and 
the  tontine  method  of  paying  dividends  was  for- 
mulated. 

The  favor  with  which  endowments  were  received 
proved  that  insurance  combined  with  investment 


199 

appealed  to  the  public,  but  then,  as  now,  the  num- 
ber who  could  afford  to  pay  the  premium  on  a  full 
endowment  policy  was  limited.  Moreover,  the 
managers  of  those  days  were  not  one  whit  behind 
those  of  the  present  time  in  recognizing  that  the 
great  evil  of  the  business  was  the  tendency  to 
lapse,  and  much  thought  was  no  doubt  given  to 
ways  and  means  of  encouraging  policy-holders  to 
persist  in  their  payments.  There  was  a  demand 
for  a  policy  which  would  provide  not  only  against 
death,  but  which  would  furnish  a  safeguard  against 
the  emergencies  of  life.  Efforts  were  made  to  meet 
these  conditions  by  reserve  endowments — life 
rate  endowments — accelerative  dividend  policies 
— and  other  forms,  but  the  only  practical  and  suc- 
cessful solution  of  the  problem  was  found  in  the 
semi-tontine  or  accumulation  policy.  This  form 
preserves  the  equities  of  the  insured,  provides  pro- 
tection while  it  is  needed,  and,  when  protection  is 
no  longer  a  serious  consideration,  the  contract  be- 
comes an  investment,  or  makes  provision  for  old 
age. 

ENCOURAGEMENT    TO    SAVE. 

The  semi-tontine  policy  is  also  a  great  encour- 
agement to  saving.  Few  men  would  save  money 
unless  they  had  some  strong  inducement.  This  is 
especially  true  in  the  case  of  small  sums.     Annual 


200 

dividends  are  generally  drawn  in  cash,  but  I  doubt 
if  any  one  in  this  Convention  can  cite  an  instance 
to  show  that  any  holder  of  an  annual  dividend  pol- 
icy had  deposited  his  dividend  each  year  in  a  sav- 
ings bank,  or  had  invested  it  in  any  other  manner. 
Generally  the  dividends  are  for  such  small  amounts 
that  little,  if  any,  stress  is  laid  upon  the  sum  they 
would  produce  in  the  course  of  time  through 
accretions  of  interest  and  the  addition  of  other 
dividends.  Every  one  would  be  astonished  at 
the  forethought  of  a  man  who  could  at  the  end 
of  twenty  years,  for  example,  show  a  snug  sum  on 
deposit  in  a  savings  bank  that  had  been  built 
up  in  this  way.  If,  therefore,  the  investment  of 
annual  dividends  is  to  be  commended,  why  should 
not  the  holder  of  a  semi-tontine  policy  be  more 
emphatically  praised  if  his  forethought  leads  him 
to  take  a  form  of  insurance  which  will  enable  him 
to  invest  his  annual  overcharge  or  profit  to  far 
better  advantage.  If  the  most  liberal  dividends 
paid  by  any  annual  dividend  company  in  the  past 
twenty  years  are  compounded  at  4^,  the  result  will 
be  greatly  below  the  Accumulation  dividend  on  a 
similar  policy.  The  holder  of  a  semi-tontine  pol- 
icy is  given  every  encouragement  to  persist  in  his 
original  intention,  and  if  he  succeeds,  he  is  re- 
warded for  his  prudence  far  better  than  he  would 
be  under  any  other  plan  of  insurance.     In  brief, 


201 

Tontine  dividends  may  be  cited  as  another  evi- 
dence of  ''the  triumph  of  collectivism  over  indi- 
vidualism." 

TONTINE    EECOGNIZED    IN    FINANCE. 

The  advantages  of  building  up  profits  on  the 
tontine  plan  are  recognized  by  every  financial 
institution  of  importance  and  strength.  Surplus, 
undivided  profits  and  reserve  fund  in  other 
financial  institutions  are  synonymous  with  ton- 
tine profits  in  life  insurance.  In  fact,  the  word 
''tontine,"  as  used  in  matters  of  finance,  may  be 
defined  as  "the  holding  back  of  small  present 
profits  in  order  that  large  future  profits  may  be  re- 
alized." 

A  marked  case  of  the  productiveness  of  profits 
accumulated  on  the  tontine  plan  is  that  of  the 
Fifth  Avenue  National  Bank,  of  New  York, 
which,  although  organized  in  1875  with  a  cash 
capital  of  $100,000,  did  not  pay  a  dividend  untill891. 
Its  surplus  now  amounts  to  $100,000 ;  its  undi- 
vided profits  to  $1,020,000,  and  a  share  of  its  stock 
of  the  par  value  of  $100  now  has  a  book  value 
of  $1,220.  When  this  bank  began  to  pay  divi- 
dends the  returns  were  so  large  that  each  stock- 
holder had  reason  to  congratulate  himself  that 
the  profits  were  not  divided  each  year  as  earned. 
So  under  a  policy  of  life  insurance— if  the  divi- 


202 

dends  are  paid  annually,  the  book  value  of  the 
policy  seldom  goes  above  100,  but  if  the  dividends 
are  permitted  to  accumulate  on  the  tontine  plan, 
the  book  value  of  the  policy  increases  each  year 
until  finally,  when  the  time  for  settlement  arrives, 
the  returns  amply  compensate  the  person  insured 
for  his  prudence  and  self-denial. 

MORTALITY. 

The  confidence  arising  from  unusual  strength 
and  vitality  on  the  one  hand,  and  the  misgiv- 
ings of  those  who  fear  some  inherent  physical 
weakness  on  the  other  hand^  are  not  without  their 
effects  in  life  insurance.  "  Self  selection,"  as  it  is 
called,  gives  rise  to  many  interesting  problems, 
and  it  will  no  doubt  play  a  part  in  life  insur- 
ance as  long  as  men  are  disposed  to  take  advantage 
of  intuitive  impressions  in  deciding  any  question 
pertaining  to  self-interest.  No  doubt  the  influ- 
ence of  self  selection  is  exaggerated,  but  neverthe- 
less the  fact  remains  that  the  form  of  insurance  is 
invariably  an  index  to  relative  ratios  of  mortality 
— the  highest  rate  being  found  under  policies  with 
low  premiums,  and  the  lowest  rate  being  found 
under  policies  subject  to  high  premiums.  The 
higher  priced  policies  are,  as  a  rule,  applied  for  by 
those  who  are  in  comfortable  circumstances  ;  such 
persons,  in  case  of  sickness,  receive  the  best  of 


203 

care,  secure  tlie  highest  order  of -medical  attend- 
ance, and,  after  recovering  from  an  illness,  are  dis- 
posed to  go  to  some  health  resort  to  recuperate  be- 
fore taking  up  their  daily  duties  again.  On  the 
other  hand,  persons  whose  means  are  limited  are 
generally  compelled  by  this  disadvantage  to  apply 
for  the  lower-priced  policies ;  in  case  of  sickness 
they  often  lack  proper  nursing,  the  delicacies  so 
essential  to  the  sick,  and,  perchance,  are  obliged 
to  return  to  work  before  complete  recovery  has 
taken  place. 

Making  due  allowance  for  environment  and  cir- 
cumstances, we  still  find  many  evidences  of  self 
selection,  and  this  trait  comes  very  emphatically 
into  play  under  the  semi-tontine  policy.  Only 
those  who  can  look  forward  in  the  most  hopeful  man- 
ner to  long  life,  and  who  are  conscious  of  strength 
and  vitality,  are  apt  to  apply  for  semi-tontine 
policies,  and  in  consequence  mortality  is  much 
more  favorable  under  semi-tontine  policies  than 
under  annual  dividend  or  non-participating  pol- 
icies. As  low  mortality  is  one  of  the  chief  sources 
of  profits  in  a  life  insurance  company,  the  effect  of 
this  tendency  upon  dividend  earnings  is  very 
marked. 

PEKSISTENCY. 

It  is  evident  that  any  feature  that  can  be  intro- 
duced into  the  policy  which  encourages  the  holder 


204 

thereof  to  keep  his  insurance  in  force  is  of  direct 
benefit  both  to  the  policy-holder  himself  and  to 
the  company.  The  tontine  method  of  paying 
dividends  has  undoubtedly  accomplished  this  pur- 
pose far  better  than  any  other  feature  that  has 
ever  been  introduced  into  life  insurance.  The 
books  of  one  company  to  which  I  have  access  show 
that  there  are  very  few  withdrawals  under  policies 
written  on  the  15-year  plan  after  the  seventh  an- 
nual premium  has  been  paid,  and  under  policies 
written  on  the  20-year  plan  after  the  tenth  annual 
premium  has  been  paid.  The  policy-holder  from 
the  very  outset  can  look  forward  with  confidence 
to  receiving  a  large  dividend  at  the  end  of  the 
dividend  period,  but  with  each  payment  on  the 
policy  the  date  of  its  maturity  seems  closer,  not 
only  enhancing  the  value  of  the  dividend,  but 
offering  a  constantly  increasing  encouragement  to 
continue  his  insurance  to  the  end. 

EFFECT   ON   NEW   BUSINESS. 

There  is  an  old  simile  which  says  that  new  mem- 
bers are  just  as  essential  to  a  life  insurance  com- 
pany as  new  blood  to  the  human  body.  Though 
an  exaggeration,  it  is  not  entirely  inappropriate  to 
say  that  new  members  are  essential  to  vigor, 
strength,  and  resistance  to  decay.  If  we  were  not 
to  eat  the  foods  which  replenish  the  blood,  our 


206 

bodies  would  become  anaemic  and  enervated,  and 
our  usefulness  would  become  seriously  impaired. 
In  like  manner,  that  life  insurance  company  which 
neglects  to  secure  the  proper  quota  of  new  mem- 
bers each  year  is  inviting  weakness,  and  respect- 
able liquidation.  To  supply  the  waste  caused  by 
deaths  and  withdrawals  and  to  secure  a  sufficient 
number  of  members  to  insure  proper  growth  be- 
comes an  important,  if  not  the  most  important, 
branch  of  our  business.  In  each  office  keen  minds 
are  taxing  themselves  with  the  formation  and  con- 
duct of  an  extensive  agency  organization  for  the 
procurement  of  new  members,  and  in  the  field,  men 
of  standing  and  intelligence  are  devoting  their 
lives  to  the  work.  We  know  that  we  cannot  pro- 
cure new  business  without  the  agent,  and  so  long 
as  this  is  the  case,  it  is  economy  and  good  judg- 
ment to  give  him  policies  to  present  which  will  in- 
crease his  efficiency  to  the  utmost.  In  1868  the 
insurances  in  force  in  regular  companies  amounted 
to  about  $1,529,000,000.  At  the  end  of  1897  the 
figures  had  been  increased  to  $5,256,000,000.  If 
we  look  at  the  figures  of  the  most  progressive  non- 
tontine  companies  during  this  same  period,  we 
shall  find  indications  that  lead  to  the  conclusion 
that,  of  the  very  large  increase  made  by  all  com- 
panies, fully  10%  was  composed  of  semi-tontine 
insurance.     This  remarkable  exhibit  proves  that 


206 

the  semi-tontine  policy  contains  the  most  con- 
vincing arguments  ever  put  in  the  hands  of  an 
agent,  and  that  it  is  unquestionably  the  best 
form  of  insurance  ever  devised  to  meet  the  con- 
trolling instincts  of  the  human  mind. 


SUREENDER  VALUES. 
THEIR  DEVELOPMENT. 

The  inclination  to  mould  the  policy  contract  to 
the  varying  conditions  of  life,  has  not  been  con- 
fined to  the  benefits  secured  by  persistency,  but  is 
observable  also  in  the  development  of  plans 
whereby  the  rights  of  the  policy-holder  in  case  of 
the  surrender  of  his  policy  are  recognized.  Sur- 
render values  were  first  allowed  in  the  form  of 
paid-up  insurance.  Subsequently  cash  surrender 
values  were  introduced,  and  more  recently  ex- 
tended insurance  has  become  a  feature  in  policy 
contracts  of  several  companies.  At  the  present 
time  the  policies  of  a  large  number  of  the  com- 
panies provide,  in  case  of  surrender,  for  a  choice 
between  paid-up  insurance  and  extended  insur- 
ance, or  between  cash  and  paid-up  insurance, 
while  the  policies  of  several  companies  offer  either 
cash,  paid-up  insurance,  or  extended  insurance. 
Only  two  or  three  companies  offer  paid-up  insurance 


207 

alone,  and  it  is  but  a  question  of  time  when  these 
companies  will  yield  to  the  pressure  of  the  general 
practice.  Each  of  the  allowances  made  in  case  of 
surrender  is  computed  on  such  a  liberal  basis  that 
it  would  seem  that  the  vexatious  question  of  the 
proper  charge  or  fine  in  case  of  surrender,  is  being 
settled  by  requiring  none  at  all.  It  is  gratifying 
to  find  that  this  liberality  has  not  encouraged  sur- 
renders, but  has  been  rewarded  by  an  increase  in 
the  tenure  of  life  of  the  policy.  In  fact,  we  are 
led  to  the  pleasant  conclusion  that  the  owner  of  a 
policy  containing  liberal  and  valuable  benefits  is  as 
slow  to  part  with  it  as  he  would  be  to  sell  any 
other  valuable  and  profitable  security. 

As  surrender  values  will  be  discussed  analytic- 
ally and  at  length  in  other  papers  to  be  presented 
to  this  Convention,  1  shall  limit  this  section  of  my 
paper  to  a  few  brief  remarks  on  the  advantages  or 
disadvantages  of  the  three  n  on -forfeiture  benefits 
mentioned. 

PAID-UP   OR   EXTENDED   INSURANCE. 

The  especial  applicability  of  either  of  these 
benefits  can  only  be  determined  by  a  knowledge  of 
the  condition  of  the  policy-holder  at  the  time  of 
surrender,  taken  with  the  standing  of  the  policy. 
In  the  case  of  a  policy  which  has  acquired  consid- 
erable value,   it  is  advisable  in  the  majority  of 


cases  for  the  policy-holder  to  take  paid-up  insur- 
ance, especially  if  he  is  well  along  in  years  and  his 
income  is  uncertain  or  is  growing  less  as  time  goes 
by.  Paid-up  insurance  does  not  entail  any  obliga- 
tion or  impose  any  burden,  nor  is  it  brought  to  a 
close  except  by  death  or  surrender.  It  is  a  secur- 
ity which  can  be  filed  away  with  the  certainty 
that  when  it  matures  it  will  realize  every  dollar 
which  it  represents.  Extended  insurance,  on  the 
other  hand,  is  the  more  advantageous  benefit  for 
those  to  take  who  are  unable  to  pay  their  premi- 
ums, but  who  feel  the  need  of  a  maximum  of  insur- 
ance, and  expect  within  a  reasonable  time  to  be 
able  to  reinstate  their  contracts  or  to  take  new  in- 
surance. Extended  insurance  is  generally  granted 
without  application  ;  in  other  words,  it  is  given 
automatically,  thus  protecting  the  policy  in  case 
the  payment  of  the  premium  is  overlooked  during 
sickness  or  absence  from  home.  Automatic  exten- 
sions have  this  particular  value — that  no  one  is 
deprived  of  the  equity  in  his  policy  through  any 
technicality  or  through  indifference  or  ignorance 
as  to  its  value. 

To  my  mind,  in  every  policy  issued,  either  paid- 
up  or  extended  insurance  should  be  made  "  auto- 
matic," and  the  companies  should  not  rest  content 
with  merely  granting  this  privilege,  but  should,  in 
event  of  lapse,  wait  a  reasonable  time  for  the  in- 


209 

sured  to  apply  for  a  surrender  value,  but  if  he 
does  not  appear  within  this  time  he  should  be  fol- 
lowed up  and  a  statement  placed  in  his  hands  giv- 
ing the  value  of  the  benefit  to  which  he  is  entitled 

CASH   SURRENDER  VALUES. 

The  arguments  which  I  have  advanced  in  favor 
of  making  provision  in  the  policy  for  every  emer- 
gency of  life,  point  to  the  devisability  of  granting 
liberal  cash  values  after  the  necessity  of  protection 
may  have  passed  away  and  provision  for  self  may 
have  become  the  first  consideration,  or  after  the 
policy  has  been  in  force  for  the  period  for  which 
in  the  first  instance  it  was  advisedly  taken  out. 
While  the  propriety  of  allowing  cash  surrender 
values  for  the  purpose  which  I  have  defined  is  ap- 
parent, there  is  little  to  justify  the  guarantee  of 
annual  cash  surrender  values  in  the  early  years  of 
a  policy,  unless  it  is  that  we  must  take  a  very 
cold-blooded  view  of  our  business,  and  say,  that 
an  equity  in  the  reserve  on  the  policy  belongs  to 
the  insured,  and  that  he  should  have  the  right  to 
do  as  he  pleases  with  this  equity.  I  would  con- 
tend that  the  insured  having  advisedly  entered 
into  a  compact  with  the  company  to  provide  cer- 
tain benefits  for  his  family  and  for  himself,  such 
compact  imposes  on  the  company  the  obligation  to 
protect  the  insured  from  a  hasty,  or,  perhaps  a 


210 

foolish  step  that  may  defeat  the  good  object  he 
had  in  mind  when  he  entered  upon  the  contract. 

A  man  is  not  likely  to  apply  for  a  cash  surren- 
der value  in  the  early  years  of  a  policy  unless  he 
has,  through  ignorance  or  prejudice,  become  dis- 
satisfied with  the  company  in  which  he  is  insured, 
or  unless  he  is  in  such  a  tight  place  financially 
that  he  must  secure  cash  at  all  hazards.  A  man 
who  demands  cash  for  the  reason  first  given  is  en- 
titled only  to  the  same  consideration  that  we 
would  give  to  any  impulsive  or  thoughtless  re- 
quest. In  the  case  of  a  man  whose  affairs  are  so 
badly  involved  that  he  is  obliged  to  resort  to  his 
policy  for  financial  help,  it  is  fair  to  assume  that, 
by  reason  of  his  difficulties,  he  needs  life  insur- 
ance more  at  that  particular  time  than  at  any 
other  period  in  his  life.  It  seems  more  in  accord- 
ance with  the  spirit  of  life  insurance  to  give  him 
the  desired  assistance  in  the  form  of  a  loan  and  to 
extend  with  it  the  opportunity  of  continuing  the 
life  insurance.  There  are  individual  cases,  of 
course,  the  circumstances  surrounding  which  call 
for  cash  surrender  values.  Such  cases  should  be 
taken  up  on  their  respective  merits,  but  it  does 
not  follow,  because  cash  values  can  with  propriety 
be  allowed  in  certain  cases,  that  the  interests  of 
policy-holders  or  of  the  company  require  that  they 
shall  be  given  in  all  cases,  irrespective  of  conditions. 


211 


CONCLUSION. 


Ln  conclusion,  I  wish  to  express  a  thought  that 
comes  to  me  very  forcibly  as  I  write  these  lines.  It 
is  that  the  remarkable  improvements  and  changes 
in  our  business  in  the  past  few  years  are  influ- 
enced by  motives  more  sincere  and  subtle  than 
would  be  dictated  by  mere  business  policy. 

Can  we  not  discover  in  them  evidence  of  a  grow- 
ing sense  of  conviction  on  the  part  of  those  to 
whom  the  administration  of  our  companies  is  con- 
fided, that  life  insurance  is  a  trust  imposing  moral 
as  well  as  literal  obligations  which  must  be  ob- 
served to  the  utmost  degree  ? 

We  may  not  claim  that  life  insurance  has 
reached  a  state  of  perfection,  but  we  may  assert 
that  the  tendencies  of  the  business  are  in  the  right 
direction,  and  that  there  are  forces  at  work  which 
will  produce  further  and  beneficial  transformations 
as  time  goes  by.  Let  us  hope  that  these  may  all 
be  accomplished  in.  the  next  decade,  and  that  we 
may  enter  the  year  1910  under  conditions  which 
will  give  universal  satisfaction. 


INDUSTRIAL  INSURANCE. 


JOHN  R.  HEGEMAN  : 

\  yl  /ITH  respect  to  the  subject  assigned  to  me,  I 
^  ^  am  reminded  of  an  interview  I  once  had — 
and  it  was  but  a  comparatively  short  time  since — 
when  an  intelligent  gentleman,  who  had  been  an 
editor  of  a  paper  and  a  member  of  a  legislature, 
said  •  "•  But  hold  on,  what  is  Industrial  Insurance, 
anyway?"  And  when  I  told  him  he  contended 
that  it  was  a  misnomer.  He  said:  "I  know  a 
little  of  Fire  Insurance  and  Marine  Insurance  and 
I  have  heard  of  Plate  Glass  and  Fidelity  and  a  lot 
of  others,  and  they  explain  themselves  ;  but  there 
is  nothing  in  your  title  '  Industrial  Insurance,'  per 
se,  that  attaches  it  to  human  life,  and  your  baby 
was  dubbed  with  the  wrong  name. ' '  Perhaps  there 
was  something  in  his  criticism.  The  word  **  In- 
dustrial," especially  of  late  years,  and  particu- 
larly in  this  country,  has  come  to  almost  wholly 
refer  to  the  products  or  processes  of  manufacture, 
and  to  commercial  production  generally.    In  the 


213 

newspapers,  on  the  stock  exchanges,  among  busi- 
ness men  in  general,  ''Industrial"  has  pretty  well 
narrowed  down  to  a  single  application— that  is,  as 
the  ''Standard"  defines  it:  "A  stock,  or  secur- 
ity, based  upon  the  incorporation,  or  capitaliza- 
tion, of  an  established  manufacture  or  business,  or 
to  the  incorporated  company  or  enterprise  itself." 
So  we  speak  of  "sugar''  as  an  "Industrial,"  and 
of  spirits  and  tobacco  and  glucose  and  oil  and  a 
host  of  other  things.  "Why  don't  you  call  it," 
our  critic  asked,  "Industrial  Life  Insurance,  or 
Life  Insurance  for  the  Working  Classes,  or  Family 
Insurance — then  a  greenhorn  might  guess  what  you 
mean?"  There  is  no  implication  in  all  this  that 
any  gentleman  present  is  unfamiliar  with  the  char- 
acter of  the  work  expressed  by  these  two  words, 
and  the  general  familiarity  with  it  now  is  a  forci- 
ble tribute  to  the  rapid  development  and  vast 
scope  of  the  business.  So  we  may  affirm  that  the 
title,  like  the  business,  has  come  to  stay,  and  the 
two  I's  will  remain  in  it  forever. 

THE  ORIGIN   OF  INDUSTRIAL  INSURANCE. 

Like  many  another  good  thing,   this  business 

had  its  first  development,  along  present  lines,  in 

*  Great  Britain.     Its  particular  name  came  to  be  of 

world-wide  familiarity  through  the  operations  of 

the  Prudential  Assurance  Company  of  London,  of 


214 

which  more  anon.     It  was,  of  course,  an  outcome 
of  the  general  principle  of  insurance  as  applied  to 
the  contingencies  of  human  life,  and  that,  in  one 
form  or  another,   goes  back  many  hundreds  of 
years.     In  every  community,  from  the  beginning 
of  recorded  time,  there  have  existed  all  the  grada- 
tions of  life  between  poverty  and  plenty.  In  times 
of  stress  the  individual  has  appealed  for  help  to 
friends    and    neighbors.     Out    of    this    naturally 
evolved  crude  systems  of  mutual  aid.     Combina- 
tion thus  had  its  birth.     Limited  to  specific  occu- 
pations, as  some  were,  we  perceive  the  germ  of 
Trade  Unions.  Among  the  Romans  we  find  records 
of   '' Funeral   Societies,"    in  which,   for  a  small 
monthly  payment,  each  member  was  assured  inter- 
ment in  a  grave  of  his  own,  a  funeral  attended  by 
his  own  fellow-members,  a  tablet  with  his  name 
inscribed  upon  it ;  and,  if  he  left  a  helpless  family, 
upon  them  were  bestowed  gratuities.     The  Greeks 
had  their  Fraternities  and  the  Teutons  their  Guilds. 
From  them  the  movement  of  combination  and  or- 
ganization, in  time,  reached  England,  and  out  of 
crude  and  faulty  schemes  were  gradually  devel- 
oped the  Burial  Club,  the  Friendly  Society,  the 
Life  Insurance  Company  (as  ordinarily  known), 
and  the  Industrial  Insurance  Company.    We  place  * 
the  progenitors  of  the  Industrial  movement — that 
is,  the  Burial  Club  and  the  Friendly  Society—  in 


215 

the  order  named,  because,  while  we  find  records  of 
Ordinary  Life  Insurance  Companies  in  England  in 
the  early  part  of  the  seventeenth  century,  and  a 
plan  of  annuities  put  in  operation  by  the  States 
General  of  Holland  in  1671,  we  find  Friendly 
Societies  in  Great  Britain  as  early  as  1634,  and  we 
read  of  Burial-Fund  Clubs  in  the  Netherlands  in 
1622. 

ANTIQUAEIAN  RESEARCHES. 

Not  to  be  caught  napping  by  the  antiquarian, 
and  to  stand  with  Solomon  on  his  proposition  that 
"  there  is  no  new  thing  under  the  sun,"  we  are  pre- 
pared to  maintain  that  the  Insurance  principle — 
and  the  Industrial  principle  at  that — far  antedates 
all  the  years  named,  and  goes  back  to  a  period 
some  1700  years  before  the  Christian  Era  ;  that  was 
when  the  Pharaoh  Mutual  Life  Insurance  Com- 
pany was  formed  under  the  auspices  of  the  King  of 
Egypt.  Those  of  you  from  whose  memories  the 
teachings  of  early  years  have  not  been  altogether 
eliminated  will  recall  that  in  the  years  of  plenty 
he  prepared  for  and  thus  insured  against  the  years 
of  want.  And  he  vindicated  the  "  Old-Line  "  prin- 
ciple by  setting  aside  an  adequate  Reserve.  His 
assets  were  invested  in  the  granaries  of  Egypt, 
and  in  their  contents  of  corn  ;  and  when  the  years 
of  need  came  those  assets  met,  as  we  read,  not  only 
every  demand  of  the  Egyptians,  but  of  all  the  sur- 


216 

rounding  country.  Here  was  the  first  great  Inter- 
national Company !  Oh,  yes,  the  people  of  mod- 
ern times  are  clever  and  brilliant,  but  along  many 
lines  they  are  simply  adopters,  or  adapters  (not  in- 
ventors), of  things  thousands  of  years  old. 

For  another  illustration  :  Among  the  numerous 
and  we  might  say  numberless,  tables  in  the  rate- 
books of  some  of  the  Life  Companies  is  an  in- 
genious one,  called  ''Life,  with  the  return  of  pre- 
miums." As  its  name  implies,  the  face  of  the 
policy,  and,  in  addition,  all  the  premiums  received 
by  the  company,  are  payable  upon  the  death  of 
the  insured.  Who  originated  that  ?  It  was  none 
of  the  modern  actuaries,  with  their  commuta- 
tions and  formulas  and  interpolations  and  other 
concomitants  of  confusion.  But  it  was  the  gentle- 
man who  rose  from  the  pit  to  be  Prime  Minister  of 
Egypt.  For  do  we  not  read  that  when  Joseph's 
brethren  came  for  their  insurance,  he  "  commanded 
to  fill  the  sacks  with  corn — and  to  restore  every 
man's  money  into  his  sack — and  to  give  them  pro- 
visions for  the  way ' '  ?  Here  was  the  face  of  the 
policy — the  return  of  all  the  premiums — and  a 
dividend  besides !  Yes,  we  are  right  in  our  con- 
tention that  for  the  life  insurance  principle  as  first 
known  to,  and  applied  by,  the  sons  of  men,  we 
must  go  back  to  the  pages  of  Holy  Writ.  The 
words  "  Insurance"  and  **  Assurance"  have  each, 


217 

and  both,  been  applied  to  the  science  of  life  con- 
tingencies. Much  ink  has  been  spilled  by  able  in- 
surance philologists  in  the  advocacy  and  defense 
of  each,  and  among  some  of  the  journalists  of 
modern  times  the  controversy  has  been  waged  with 
pens  that  scratched.  ''Insurance,"  we  believe, 
nowhere  occurrs  in  the  Bible  ;  but  in  Deuter- 
onomy we  read  these  words:  "And  thou  shalt 
fear  day  and  night,  and  shalt  have  none  Assurance 
of  thy  Life." 

And  now,  on  the  principle  of  arousing  the  friend 
who  asked  his  companion — when  the  preacher 
began  his  discourse  by  starting  with  Adam — to 
wake  him  up  when  the  Dominie  got  down  to  the 
nineteenth  century,  let  us  direct  our  thoughts  to  a 
few  facts  connected  with  the  business  as  it  stands 
to-day. 

THE   GENERAL   PLAN   OF   INDUSTRIAL  INSURANCE 
IN   THE    UNITED   STATES. 

First,  we  define  Industrial  Insurance  and  its  gen- 
eral form  of  procedure,  as  operated  in  the  United 
States,  as  insurance  on  healthy  human  lives  ;  cover- 
ing all  ages  from  two  next  birthday  to  seventy, 
inclusive  ;  in  amounts  ranging  from  $8  to  $1,200 
per  policy  ;  applicable  alike  to  both  sexes ;  with 
premiums  (under  most  of  the  tables  and  on  the 
great  bulk  of  the  business)  running  from  five  cents 


218 

per  week,  and  multiples  thereof,  up  to  one  dollar  ; 
with  collections  made  weekly  by  the  companies' 
agents  from  the  homes  of  policy-holders  ;  with 
four  weeks'  grace  in  the  payment  of  premiums  ; 
with  the  proceeds  of  the  insurance  payable  at 
death  or  at  the  end  of  the  endowment  term  ;  with 
all  claims  paid  immediately  upon  proof  ;  and  with 
paid-up  policies,  cash  dividends,  and  extended 
insurance.  This  covers  the  salient  features  of  the 
business  in  this  country,  with  certain  differences 
applicable  to  particular  companies.  In  briefly  in- 
forming you  as  to  some  of  the  tables,  I  will,  if  you 
please,  refer  to  those  of  the  company  with  which 
I  am  identified,  as  substantially  representative  of 
the  business  in  general. 

We  have  said  that  the  unit  of  premium  on  most 
of  the  business,  and  as  applicable  to  all  ages,  is 
five  cents  per  week  (the  exception  is  a  3-cent 
premium  in  Canada)  ;  over  against  this  are  a  few 
tables,  where,  for  a  round  sum  of  insurance— such, 
for  example,  as  an  ''  even  $500  " — the  weekly  pre- 
mium (varying,  of  course,  with  the  age)  is  adapted 
to  the  amount  at  risk  ;  or,  to  put  it  in  another  way, 
by  the  plan  first  alluded  to,  the  insurance  is  calcu- 
lated to  the  premium  ;  in  the  plan  last  mentioned, 
the  premium  is  calculated  to  the  insurance. 

As  there  is  no  admission  charge,  initiation  fee, 
contribution    for  expenses,   or  anything  beyond 


219 

the  stipulated  weekly  premium  required  from  the 
assured,  and  as  the  heaviest  outlays  imposed  upon 
the  companies  are  for  the  procuration  of  new  busi- 
ness, the  death  benefits  under  certain  tables  are 
graded  during  the  first  six  months,  and  on  others 
during  the  first  twelve  months  of  insurance,  and  are 
operative  for  the  full  sum  insured  only  after  the.ex- 
piration  of  these  periods.  *But  on  the  great  bulk  of 
the  adult  business,  as  now  and  for  some  time  past 
written,  there  is  an  increase  in  insurance,  each  and 
every  year,  after  the  third,  of  ten  times  the  weekly 
premium ;  and  at  the  expiration  of  the  term  of 
years  shown  in  the  tables  the  maximum  amount 
matures  as  an  endowment — the  endowment  term 
running  from  10  to  70   years,    according  to   age 
at  entry.     What  are  known  as  the  adult  tables  in 
industrial  insurance  embrace  ages  from  10  to  70, 
inclusive — the  Infantile  covering  below  age  10,  to 
2  next  birthday.     No  insurance  in  this  country  is 
written  on  lives  under  one  year  old,  and  the  high- 
est premium  on  an  infantile  life  is  10  cents.     The 
scale  of  benefits  under  the  infantile  table  increases 
from  the  time  the  policy  is  three  months  old  until 
the  insured  reaches  the  minimum  adult  age  ;  then, 
every  year,  after  the  third,  fifty  cents  of  insur- 
ance is   added   for  each  ^ve  cents  of  weekly  pre- 
mium ;  the  premium,  however,  is  not  augmented  by 
these  increasing  benefits,  but  remains,  all  through, 


220 

at  its  initial  amount ;  in  other  words,  the  plan  is 
one  of  increasing  insurance  for  a  uniform  pre- 
mium. All  infantile  insurances  now  issued  by  the 
company  to  which  I  allude  mature  as  endowments 
at  the  end  of  periods  specified  in  the  policies,  vary- 
ing from  45  to  59  years.  Medical  Examinations 
vary  in  their  scope  with  different  companies — in 
some  being  applicable  to  certain  ages,  or  to  the 
amounts  of  insurance  applied  for;  but,  in  the  com- 
pany cited,  every  applicant,  of  whatever  age,  and 
for  whatever  amount,  is  examined  or  inspected  by  a 
qualified  physician.  This  feature  cost  the  Metro- 
politan last  year  nearly  $450,000.  The  average 
amount  of  insurance  per  policy  in  force  exclusive 
of  paid-ups  is  $134.32  and  the  average  premium  10 
(^nts,  the  average  infantile  premium  being  a  frac- 
tion over  6  cents.  As  to  sex  and  age,  the  policies  in 
force  are  a  close  reflex  of  the  proportions  of  the 
genera^  population. 
^  To  circumvent  speculation — to  guard  against 
over-insurance — adult  policies  provide  that,i[after 
a^first  insurance  has  been  effected  on  an  individual 
life,  any  other  policy  obtained  on  that  life  will  be 
void,  except  under  special  written  endorsement 
permitting  such  additional  insurance  ;  and  in  the 
case  of  infantile  policies,  where  several  companies 
have  been  found,  at  death,  to  have  insurances  in 
force  on  one  life,  no  amount  of  insurance  beyond 


221 

the  maximum  permitted  by  any  one  company  is 
recognized,  and  that  amount  is  adjusted,  pro  rata^ 
among  the  companies  interested  ;  and  in  cases 
where  this  maximum  is  transgressed,  the  excess  of 
premiums  is  returned  where  the  policies  are  thus 
adjusted. 

INDUSTRIAL   INSURANCE  IN  GREAT  BRITAIN. 

Let  US  divert  our  attention  for  a  few  moments 
and  look  across  the  water  to  the  Prudential  Assur- 
ance Company,  Limited,  of  London,  to  which  pass- 
ing reference  has  hereinbefore  been  made.  The 
history  of  this  institution  is  practically  the  history 
of  industrial  insurance  in  the  United  Kingdom, 
and  its  general  plan  of  operation  has  been  that  fol- 
lowed by  the  industrial  companies  of  the  United 
States.  The  London  Prudential  was  organized  in 
1848  to  work  the  usual  forms  of  life  insurance, 
and  it  was  not  until  1854  that  it  essayed  the  busi- 
ness of  industrial  insurance.  Several  years  there- 
after the  directors  made  a  thorough  investigation 
of  its  industrial  affairs.  It  was  found  that  the  re- 
sults obtained  had  been  wholly  incommensurate 
with  the  expenses  incurred,  and  that  unless  an  im- 
mediate change  took  place,  not  only  would  the  in- 
dustrial branch  have  to  be  closed,  but  the  ordin- 
ary business  would  be  imperiled.  Still  later,  the 
outlook  continuing    discouraging,    a   proposition 


222 

was  made  to  the  board  to  abolish  the  industrial 
business  altogether.  One  more  effort,  however, 
was  resolved  upon,  in  pursuance  of  which  large 
sums  of  money  were  lent  to  the  company  from  the 
private  resources  of  the  directors,  or  we're  borrowed 
from  personal  friends,  the  directors  being  respon- 
sible for  the  repayment  of  principal  and  interest. 

The  youngest  age  then  taken  by  that  company 
was  10  years,  the  oldest  60.     Later,  the  minimum 
was  reduced  to  age  7.     Only  one  of  the  company's 
representatives  at  this  time  did  any  considerable 
amount  of  industrial  insurance,  and  upon  enquir- 
ing into  the  cause  of  his  success  it  was  found  that, 
to  meet  the  urgent  demands  of  the  working  classes, 
he  had  started  a  society  of  his  own,  in  which  he 
insured  the  lives  of  children  too  young  for  admis- 
sion into  the  Prudential.     Thus  insuring  the  chil- 
dren, he  found  it  easy  to  persuade  the  parents  to 
insure  their  own  lives  in  the  Prudential.     There- 
upon the  company  took  over  the  children  insured 
in  his  society,  and  this  incident  furnished  the  start- 
ing point  for  their  new  table  on  which  the  mini- 
mum age  at  entry  was  ''  not  under  three  months." 
But  for  fear  of  failure  this  table  was  not  allowed 
to  be  generally  circulated,  but  was  confined  to  the 
use  of  agents  only.     These  facts  are  cited  in  view 
of  their  relation  to  the  company's  present  con- 
dition, which  will  shortly  be  alluded  to. 


223 

The  London  Prudential  now  insures   from  the 
age  of  one   week   upward.     From  ages  one  next 
birthday    to  ten,    inclusive,   its  premium  is   one 
penny  sterling  per  week,  and  no  higher  premium  is 
taken.     To  this  company  belongs  the  credit  of  in- 
augurating the  plan  of  increasing  insurance  with 
uniform  premium,    the   minimum   benefit  at  the 
lowest  age  being  £1-10-0,  increasing  with  the  age 
of  the  policy    to    the   maximum  of   £10-0-0,  the 
benefits  beginning  after  three  calendar  months. 
From    ages     11    to    75     inclusive,    their     tables 
run  from  one  penny  to  six    pence   sterling  per 
week,  for  a  sum  payable  at  death,  with  provision 
for  an  increase  of   the  sum  insured  according  to 
the  duration  of   the  policy.     From  ages  16  to  70 
inclusive,  they  issue  industrial  policies  for  $250, 
$5()0,  and  $1,000,  with  weekly  premiums  adapted 
to  the  age  of  the  insured.     They  also  issue  old-age 
endowments  combined   with  life  assurance,  from 
infancy  to  age  65,  for  one  penny,   two  pence  and 
four  pence  weekly,  with  immediate  cash  payments 
if  the  premiums  be  discontinued  after  a  prescribed 
time.     Various  other  forms  are  also  issued,  com- 
bining life  and  endowment    features,   joint    life 
insurances,    deferred    annuities    and    whole    life 
insurances,   etc.,  for  a  penny  to  twelve  shillings 
per  week,  and  for  larger. sums  than  those  published 
in  their  rate  books  (as  applicable  to  adult  lives) 


y^ 


224 

at  proportionate  premmms.  Adult  policies  are  in 
immediate  benefit  to  the  extent  of  one-fourth  the 
face  of  the  policy,  if  death  occur  the  first  three 
months,  one-half  after  three  calendar  months,  and 
full  benefit  after  twelve  months.  In  cases  of  acci- 
dental death,  immediate  full  benefits  are  payable. 
An  extra  premium  of  six  pence  per  cent,  weekly 
is  charged  on  all  policies  of  $250  and  upward  on 
the  lives  of  publicans  and  others  engaged  in  the 
liquor  business.  Lapsed  policies  are  revivable 
without  fine  any  time  within  a  year  of  the  date  of 
last  payment  on  evidence  of  good  health  and  the 
payment  of  arrears.  Policies  of  five  years'  dura- 
tion may  be  exchanged  for  paid-ups,  provided  the 
insured  has  reached  15  years  of  age.  Policies  for 
$250  and  upwards,  by  quarterly,  semi-annual,  or 
yearly  payments,  are  issued  in  the  ordinary 
branch. 

From  the  tribulations  of  early  years,  as  herein- 
before referred  to,  let  us  see  how  the  company  has 
emerged  up  to  the  present  time.  In  1854,  when  it 
began  its  industrial  work,  the  amount  of  premiums 
collected  from  both  branches,  ordinary  and  indus- 
trial, was  a  trifle  over  $15,000.  Last  year  (1897) 
the  premiums  received  in  its  industrial  branch 
alone  were  a  little  under  $24,000,000.  The  number 
of  industrial  claims  paid  within  the  year  was 
194,236,  the  average  amount  paid  under  infantile 


226 

policies  being  $13,  and  on  adults  $34.  It  has  more 
than  14,000  active  agents,  distributed  over  nearly 
every  city,  town,  village,  and  hamlet  of  England, 
Scotland,,  and  Wales,  and  to  a  lesser  extent  in  Ire- 
land. Its  total  number  of  Industrial  policies  in 
force,  January  1,  1898,  was  12,546,132,  equivalent 
to  about  one-third  the  population  of  Great  Britain 
and  Ireland.  Its  industrial  assets  were  over 
$76,000,000.  The  average  premium  on  its  indus- 
trial policies  is  about  4  cents  per  week,  and  the 
average  amount  insured  $47.  Combining  the  fig- 
ures of  both  its  branches,  Ordinary  and  Industrial, 
we  find  its  income  in  1897  to  have  been,  in  round 
numbers,  $38,000,000,  and  its  assets  $152,000,000— 
its  growth  in  accumulations  for  the  year  having 
been  $17,000,000.  It  is  interesting  to  note  that 
upon  the  dominant  personality  in  the  creation  and 
development  of  this  remarkable  institution,  Mr. 
Henry  Harben,  the  honors  of  Knighthood  were 
conferred,  upon  the  occasion  of  the  Queen's  recent 
Diamond  Jubilee. 

Sixteen  industrial  life  companies  are  operat- 
ing in  England,  the  latest  obtainable  figures  show- 
ing 15,301,621  policies  in  force,  $736,000,000  at  risk, 
$33,000,000  in  annual  premium  income,  and  an 
average  amount  of  insurance  per  policy  of  $46.50 


226 


EXTENT  OF   INDUSTRIAL  INSURANCE  IN  THE  UNITED 

STATES. 

Let  US  recross  the  Atlantic  and  see,  briefly,  what 
our  own  country  has  been  doin^.  There  are  thir- 
teen companies  transacting  industrial  insurance 
in  the ,  United  States  (there  were  two  others,  the 
Q-ermania  and  the  Provident  Savings,  both  of 
which  discontinued  it  some  years  ago),  and  their 
names  are  as  follows  : 


The     Metropolitan     Life  / 

Insurance   Company,      C 

The  Prudential  Life  In- [ 

surance  Company,         ) 

The    John   Hancock  Mu-  / 

tual  Life  Insurance  Co..    f 

The  Pacific  Mutual  Life  ) 

Insurance  Company,       f 

The  Life  Insurance  Com-  [ 

pany  of  Virginia,  j 

The  Sun  Life  Insurance  ) 

Company,  j" 

The  Western  &  Southern  i 

Life  Insurance  Co.,        i 

The     Baltimore    Mutual 

Life  Insurance  Company, 

The  Provident    Life.  In-) 

surance  Company,         f 

The  Citizens  Mutual  Life  i 

Insurance  Company,       f 

The    Immediate    Benefit  i 

Life  Insurance  Company,  ) 


.  of  New  York. 
.  of  Newark,  N.  J. 
.  of  Boston,  Mass. 
.  of  San  Francisco,  Cal. 
.  of  Richmond,  Ya. 
.  of  Louisville,  Ky. 
.  of  Cincinnati,  Ohio. 
.  of  Baltimore,  Md. 
.  of  Wheeling,  W.  Va. 
.  of  Atlantic  City,  N.J. 
.  of  Baltimore,  Md. 


227 

^^  SS^ai^rny?'^^'^^-  (   •  o*  St.  Louis,  Mo. 
"^'^  SJ^tom^if^y!'^^^"-  [   •  of  J--^  City,  N.  J. 

The  gross  assets  of  these  companies,  December 
31,  1897,  in  round  numbers,  were  $76,000,000,  of 
which  about  one-half  may  be  credited  to  the  Met- 
ropolitan, and  93  per  cent,  to  the  Metropolitan,  the 
Prudential  and  the  John  Hancock.  The  increase  of 
accumulations  last  year  was  $12,483,844,  of  which 
that  of  the  three  companies  named  was  $11,848,772, 
or  95  per  cent.  The  amount  of  insurance  writ- 
ten by  all  was  $492,000,000 — the  three  companies 
doing  92  per  cent.  The  total  insurance  in  force  is 
$1,159,068,096,  of  which  95  per  cent,  belongs  to  the 
three  named.  The  premium  income  of  all  was 
$44,193,348,  the  three  companies  standing  for 
nearly  94^  per  cent.  The  united  surplus  was 
$12,649,377,  about  87  per  cent,  belonging  to  the  two 
companies  first  named,  and  94  per  cent,  to  the 
three.  Their  payments  to  policy-holders  during 
the  year  were  over  $16,000,000 — the  share  of 
the  three  being  ninety -three  per  cent.  In  all  they 
have  paid  from  the  beginning  more  than  $100,- 
000,000.  Their  contributions  to  the  State  through 
taxes,  license  fees  and  other  like  charges  (not,  of 
course,  including  taxes  on  real  estate)  have, 
during  the  last  five  years,   amounted  to    about 


228 

$2,000,000.  Thoiigh  the  ordinary  figures  of  all 
these  companies  are  included  in  these  returns, 
the  great  bulk  of  their  business  is  industrial, 
and  the  published  reports  do  not  show  the  divi- 
sion of  the  two  departments  except  as  to  poli- 
cies and  outstanding  insurance.  These  latter  re- 
veal, in  round  numbers,  8,000,000  of  industrial 
policies  in  force  (of  which  we  may  observe  that 
one-fifth  are  on  lives  under  10  and  80  per  cent,  are 
on  lives  over  10),  equivalent  to  more  than  the 
population,  according  to  the  last  U.  S.  census,  of 
all  the  Territories  and  twenty  of  the  States  of  the 
Union  combined,  and  representing  in  round  num- 
bers one  thousand  millions  of  insurance.  And  all 
this  without  a  rebate  !  The  largest  business  ever 
written  by  any  life  insurance  company  of  the 
world  in  a  single  year  stands  to  the  credit  of  one  of 
the  industrial  companies,  and  that  was  in  1894, 
when  an  average  of  more  than  a  million  of  insur- 
ance a  day  for  every  working  day  of  the  year  was 
written.  The  industrial  insurance  business  is  dis- 
tributed over  40  States  (and  in  Canada),  about  30 
per  cent,  of  it  being  in  New  York  State  alone,  and 
nearly  60  per  cent,  in  New  York,  Pennsylvania  and 
New  Jersey.  In  one  of  these  States  the  commis- 
sioner observes  in  his  last  report  that  the  indus- 
trial insurance  written  in  his  State  during  1897  was 
greater  by  nearly  ten  millions  than  that  of  all  the 


229 

companies  on  the  ordinary  plan.  We  may  here 
observe,  parenthetically,  that  the  universality  of 
industrial  insurance,  even  in  its  present  develop- 
ment, is  a  marked  feature  of  the  business.  It  is 
rarely,  if  ever,  that  an  unusual  loss  of  life  occurs 
on  land  or  sea,  by  fire  or  flood,  through  epidemic 
or  other  disaster,  but  that  Industrial  Insurance  is 
in  evidence.  For  example :  400  persons  were 
killed  by  the  St.  Louis  tornado,  and  68  Policies 
were  paid  by  the  Metropolitan  alone,  in  amounts 
varying  from  $15  to  $700  each.  In  the  Johnstown 
flood  disaster  it  paid  61  Policies.  The  sinking 
of  the  ''Maine"  brought  46  claims  against  the 
three  companies  to  which  we  have  specially 
referred.  Before  the  Santiago  naval  battle  one 
man  was  killed  on  the  "  Yankee  " — and  he  was  in- 
sured in  the  Metrox)olitan.  During  that  battle  one 
man  only  was  killed — on  the  "Texas"— and  he 
was  insured  in  the  Metropolitan.  And  so  the  illus- 
trations might  be  indefinitely  extended. 

There  are  some  30,000  men  in  the  service  of  the 
companies  as  agents.  The  industrial  operations 
of  the  three  companies  specified  were  inaugurated 
about  20  years  ago,  the  other  companies  following 
during  the  intervening  time,  the  company  last 
named  practically  beginning  this  year. 

Other  industrial  institutions  within  this  time 
have  organized  and  been  in  operation  for  periods 


230 

varying  from  eight  years  down  ;  but,  after  wrestl- 
ing with  unpropitious  fate,  they  have  succumbed 
to  the  inevitable.     The  business  is  a  difficult  and 
expensive  one  to  establish.      We   have    already 
touched  upon— though  very  briefly — the  early  ex- 
perience of  the  Great  London  Prudential.     In  the 
company  with  which  the  writer  is  identified  seven 
years  passed — many  of  them  fraught  with  dire  dis- 
couragement— before  the  tide  began  to  turn,  and 
between  five  and  six  hundred  thousand  dollars 
were  absorbed  by  expenses  and  plant  before  the 
business    was    regarded  as  self-sustaining.      One 
item  of  the  ''plant"  in  this  instance  it  may  not 
be  uninteresting  to  refer  to.     It  knew  that  to  at- 
tain immediate  leadership  in  the  United  States, 
the  first  requisite    (next  to    competent    internal 
management)  was  expert  talent  in  field-work.     It 
would  have  taken  long  years  to  educate  a  body  of 
men  in  this  country  from  whom  large  results  could 
be  assured.     So  it  imported  from  across  the  ocean 
a  body  of  competent,  experienced  workers  in  all 
the  departments  of  field  service.      This  was,  of 
course,  prior  to  the  Alien-Contract  Law,  and  it 
somewhat  prefigured  Mr.  Chamberlain's  recently 
suggested   Anglo-American    alliance !      Including 
their  families,  some  two  thousand  persons  were 
thus    added    to    the    population    of    the    United 
States. 


231 


CONCERNING   CEITICISMS   OF  INDUSTRIAL 
INSURANCE. 

EXPENSES. 

There  are  varions  points  of  difference  in  the  na- 
ture and  operation — or,  we  might  more  properly 
say,  in  the  operation  growing  out  of  the  nature — 
of  Industrial  insurance  as  contrasted  with  Ordi- 
nary life  insurance,  and  those  differences  have 
been  seized  upon  by  some,  ignorant,  or  malicious, 
or  both,  as  pegs  upon  which  to  hang  grudges,  or 
as  points  against  which  to  direct  assault. 

First,  they  have  imputed  against  it  an  unneces- 
sary and  unwarrantable  expense.  Their  basis  of 
comparison  is,  of  course,  with  ordinary  life  insur- 
ance. Either  by  design  or  by  inadvertence  they 
have  lost  sight  of  two  very  important  points 
(among  others) — that  is,  the  average  amount  in- 
sured under  industrial  policies  and  the  frequency 
with  which  the  premiums  are  collected. 

The  average  sum  insured  under  all  the  ordinary 
life  policies  in  force  in  the  United  States  is  $2,468. 
The  average  sum  insured  under  all  the  policies  (or- 
dinary and  industrial)  of  the  industrial  companies 
is  $142  per  policy.  The  average  is  thus  about  ^ 
in  the  latter  as  compared  with  the  former.  In 
other  words,  18  polices  must  be  written  by  an  in- 


232 

dustrial  company  to  equal  the  amount  issued,  on 
an  average,  on  ONE  policy  in  the  ordinary.  Or, 
let  us  put  it  in  another  way  :  the  number  of  poli- 
cies, or  separate  individual  accounts,  to  be  dealt 
with  in  connection  with  every  million  dollars  of 
insurance,  is  405  in  the  ordinary  companies 
against  7,111  in  the  industrial  companies!  This 
ratio  of  18  to  1  in  the  volume  of  labor  required  in 
connection  with  any  given  amount  of  insurance, 
holds  throughout  all  the  ramifications  of  home 
and  branch  office  work — of  all  the  indoor  routine : 
— in  examining  applications,  writing  policies,  con- 
ducting correspondence,  settling  claims,  auditing 
accounts,  keeping  the  books,  making  the  valua- 
tions, preparing  canvassing  material,  etc.,  etc. 
Yet  upon  referring  to  the  ratio  of  expense  to 
income  in  these  two  diverse  forms  of  life  insur- 
ance, we  find  (based  upon  last  year's  returns  and 
excluding  taxes)  in  the  ordinary  an  average  of 
17.34  per  cent.,  and  in  the  industrial  an  average  of 
39.17  per  cent. — a  ratio  of  2i  to  1. 

No  one  who  has  not  visited  a  large  industrial 
company's  home  office  or  made  a  study  of  its 
practical  operations,  can  have  any  idea  of  the 
amount  of  detail  involved,  all  of  which  contributes 
heavily  to  the  expense  item.  The  writer's  company 
last  year  received  on  the  average  25,000  appli- 
cations per  week.    These  came  in  on  Monday  ;  had 


233 

to  be  separately  examined  and  checked ;  passed 
upon  by  the  medical  examiner,  the  bad  ones  re- 
jected, the  doubtful  ones  postponed  or  ordered  for 
re-examination  by  the  local  physician,  the  good 
ones  passed  ;  and  the  policies  to  be  written,  checked 
off  and  sent  by  the  followins^  Thursday.  As  large 
a  number  as  80,000  applications  has  been. thus  re- 
ceived and  passed  upon  within  these  few  hours. 
When  the  policies  are  issued  the  applications  have 
to  be  sent  to  the  actuary,  who  (with  his  125  clerks) 
registers  all  the  essential  particulars  of  them  upon 
cards.  The  reserve  on  the  policies  issued  and  in 
force  is  calculated  monthly,  requiring  the  aid  of 
18  calculating  machines.  Ninety-three  millions  of 
cards  are  handled  each  year  at  the  home  office. 
These  applications  are  written  by  10,000  men  in 
the  field.  -They  collect  upon  over  4,000,000  of  poli- 
cies every  week,  and  turn  in  over  $20,000,000  a  year 
in  ten  cent  pieces  !  Compare  this  with  the  2, 204, 601 
ordinary  policies  m  force  in  all  the  other  companies 
in  the  country,  ordinary  and  industrial  combined ! 
With  each  one  of  these  field-men  an  account  is 
kept ;  and  there  are  156  bookkeepers  at  the  home 
office.  There  are  16,000  agents'  registers  in  use, 
and  228  ledgers.  The  total  number  of  agents'  ac- 
counts handled  in  a  year  is  nearly  500,000.  Fifty- 
five  millions  of  dollars  are  received  and  disbursed 
in  a  year,    and    the    number  of    cheques  drawn 


234 

amounts  to  over  117,000—87,000  cheques,  drafts, 
bonds,  etc.,  are  annually  deposited.  Twenty  cash 
books  and  twenty-eight  cheque  books  are  in  daily 
use.  There  are  2200  medical  examiners  employed  in 
the  602  branch  offices,  covering  .^314  cities,  towils  and 
villages,  and  the  number  of  medical  examinations 
and  inspections  number  over  a  million  and  a  half 
each  year.  Over  200  death  claims  a  day  are  paid, 
the  number  having  reached  in  one  day  as  many  as 
445.  The  aggregate  per  year  is  over  63,000,  and  the 
number  of  death  claims  paid  to  date  is  over  6(^0,000. 
Ten  thousand  people  every  year  either  call  at  the 
home  office  to  pay  premiums,  or  send  their  remit- 
tances through  the  mail.  One  hundred  thousand 
dollars  a  year  is  the  postage  bill  of  the  company 
and  its  district  offices.  It  may  be  imagined  that 
the  coriespondence  and  clerical  force  reach  enor- 
mous figures  at  the  home  office.  There  are  54 
stenographers  and  300  typewriters  ;  25  letter  books 
are  in  use,  and  an  average  of  10  per  week  (7000 
pages)  are  filled.  As  many  as  45  canvas  sacks  of 
mail  matter  have  been  received  in  one  day,  and 
20,000  packages  of  supplies  are  shipped  to  agents 
during  the  year.  The  number  of  different  forms 
used  in  a  year  is  nearly  50,000,000— over  550  tons  I 
—and  the  number  of  envelopes  alone  used  is  6,000,- 
000  annually.  Seven  thousand  letter  files  are  in 
use,  and  space  is  provided  for  over  34,000,000  in 


235 

the  filing  section  for  applications  alone.  In  the 
communication  between  the  members  of  the  home 
office  force,  5000  messages  are  sent  daily  through 
the  pneumatic  tubes.  To  show  the  close  connection 
between  the  insured  and  the  company,  it  may  be 
said  that  750,000  removals  of  policy-holders  are 
registered,  and  the  changes  of  name  by  marriage 
amount  to  25,000  annually.  The  Metropolitan  has 
indeed  a  large  family  to  keep  supervision  of,  and 
it  costs  money  to  do  it. 

Again,  the  same  contention  as  to  labor  involved 
and  service  rendered  presents  itself  in  the  field  op- 
erations— the  out-door  work.  Assuming  the  aver- 
age amount  per  policy  which  we  have  shown  to  be 
outstanding  in  all  the  ordinary  companies  of  the 
country  as  representing  a  premium  of  $^5  per  thou- 
sand of  insurance,  we  have  an  average  ordinary 
premium  of  $61.95  per  policy  per  annum.  These 
premiums  are  payable  annually,  semi-annually  or 
quarterly.  Notice  is  sent  to  the  policy-holder  by 
the  home  office,  or  the  local  agent,  or  both.  He 
thereupon  mails  or  otherwise  sends  his  premium 
to  the  company.  Where  an  agent  collects  in  per- 
son it  is  exceptional  and  upon  but  the  veriest 
fraction  of  the  business. 

The  average  ordinary  premium  thus  shown — the 
premium  representing  only  one  policy-holder — is 
the  equivalent  of  the  weekly  premium  of  619  in- 


286 

dustrial  policies,  and  these  industrial  premiums 
are  due,  not  annually,  semi-annually  or  quarterly, 
but  52  times  a  year,  and  they  are  not  brought  or 
sent  to  the  company,  but  are  collected  from  door  to 
door  by  its  agents  ;  and  if  the  policy-holder  is  not 
in  upon  the  agent's  first  call,  he  calls  the  second 
time  and  the  third,  and  he  keeps  on  calling  until 
the  10-cent  premium  is  collected. 

Four  hundred  and  sixteen  millions  of  visits  per 
annum  upon  the  industrial  policy  holders  in  ex- 
istence in  the  United  States  to-day  is  under  rather 
than  over  the  number  which  it  is  estimated  the 
companies  will  be  obliged  to  make.  And  this  is  at 
the  rate  of  1,328,000  visits  per  day  for  every  day  in 
the  year  except  Sundays.  If  the  policy-holders 
moves,  whether  from  street  to  street,  city  to  city, 
or  State  to  State,  the  company  follows  him,  not 
with  a  postal  card,  but  by  a  human  being  under 
pay.  When  a  claim  arises  the  company's  repre- 
sentative goes  to  the  home  and  takes  the  claim- 
ant's written  statement.  He  visits  the  doctor  and 
gets  his  certificate.  He  calls  upon  the  undertaker 
and  obtains  his  record.  When  the  money  is  re- 
ceived the  agent  carries  it  to  the  claimant.  Briefly 
from  start  to  finish  the  work  is  done  by  the  com- 
pany, and  the  company  pays  for  it. 

Doctrinaires  call  much  of  this- expense  '*  a  wicked 
waste"— they  weep  over  the  tax  thus  laid  upon 


237 

the  wage-earner — they  devise  schemes  for  improv- 
ing  the  plan  ;  but  all  their  notions  are  impracti- 
cable and  futile — the  companies  have  tried  ways 
without  number  to  lessen  this  outgo — and  a  for- 
tune awaits  the  man  who  will  invent  a  better  plan. 
Let  the  one  who  has  such  a  plan  put  it  in  practical 
operation,  and  not  simply  talk  about  it,  much  less 
waste  his  effort  in  condemning  the  existing  system. 
Faultfinding  (euphemistically  miscalled  criticism) 
is  the  cheapest  commodity  on  the  market.  In 
Scripture  days  we  read  that  "they  all  with  one 
consent  began  to  make,  excuse."  So,  now,  one 
critic  is  ''  too  old  to  undertake  it,"  and  one  is  ''too 
busy,"  and  one  is  too  something  else,  They  are 
doughty  antagonists  on  paper  and  before  legisla- 
tive committees  ;  their  statistics  and  diagrams  (in 
their  own  judgment)  are  simply  irrefutable  ;  they 
love  to  keep  themselves  ''in  evidence"  ;  as  self - 
advertisers  their  ingenuity  rises  to  the  heights  of 
Genius,  they  live  in  an  ideal  world  ;  they  soar  into 
the  infinite,  and  they  dive  into  the  unfathomable, 
but  they  never  raise  the  cash  to  organize  a  com- 
pany and  put  their  theories  to  proof. 

Among  the  features  against  which  their  declam- 
atory din  is  largely  directed,  is  the  agency  system. 
They  not  infrequently  indict  the  agent  as  one 
fattening  on  the  needs  of  the  industrial  classes. 
The  truth,  however,  is  that  the  average  earnings 


238 

of  the  agents  are  probably  well  within  those  of 
the  men  among  whom  they  solicit.  In  the  largest 
Industrial  company  in  the  country  these  earnings 
averaged  $9.07  per  week  during  the  year  1897,  and 
they  were  paid  to  a  body  of  men  characterized  as 
a  whole  by  remarkable  intelligence,  industry  and 
integrity ;  men  carrying  the  gospel  of  insurance 
to  every  doorstep  in  most  of  the  considerable  cities 
of  the  land,  and  working  longer  hours,  and,  as  be- 
f oresaid,  for  probably  less  pay,  than  most  of  those 
on  whom  they  call. 

"  Concluding  this  branch,  of  our  theme,  we  remark 
that  the  working-people,  meantime,  are  applying 
at  the  rate  of  several  millions  a  year  for  the  plan 
of  industrial  insurance  as  it  is  ;  and  when  the 
'^  better  plan  "  to  which  we  have  referred  is  found, 
they  will  be  on  hand  to  accept  it.  So  we  promptly 
admit  that  the  industrial  policy-holder  buys  his 
insurance  by  a  costly  method,  just  as  he  buys  his 
coal  in  small  quantities,  and  as  he  buys  all  the 
necessaries  of  life — by  retail.  He  can  get  it  in  no 
other  way.  And  he  is  satisfied  to  pay  the  Indus- 
trial company  for  bringing  insurance  down  to  his 
means,  and  for  hiring  some  one  to  attend  to  details 
which  he  has  no  time  to  attend  to  himself.  In 
other  words,  it  is  his  own  money,  through  the 
company,  that  pays  the  bills,  and  he  knows  it  and 
is  satisfied  with  it. 


239 

And  so,  without  going  more  into  detail  on  this 
theme — without  particularizing  the  numberless 
channels  of  outgo  imperative  to  a  retail  business 
of  the  infinite  detail  of  this — we  affirm  that  if  just 
consideration  be  given  to  the  labor  involved  in 
both  branches  of  administration — home  office  and 
field  work— it  will  be  found  that  the  services 
rendered  by  the  Industrial  and  the  Ordinary  com- 
panies respectively,  as  related  to  any  given  vol- 
ume of  business,  are  as  18  to  1,  while  the  cost  of 
management  is  in  the  proportion  of  2J  to  one. 

MORTALITY. 

Leaving  the  above  branch  of  the  subject  thus 
only  sketched  in  outline,  let  us  consider  briefly 
another  of  the  points  of  difference  in  the  two  sys- 
tems of  life  insurance,  as  bearing  directly  upon 
this  matter  of  cost — that  is,  the  mortality.  The 
mortality  among  the  industrial  classes  is  obviously 
high,  and  even  the  careless  observer  knows  the 
reasons.  The  habits  and  modes  of  life  of  many 
of  their  number ;  their  unsanitary  homes ;  inade- 
quate or  improper  food  ;  hard  work  ;  close  confine- 
ment of  some  ;  necessary  exposure  of  others  ;  lack 
of  the  best  medical  skill,  and,  such  as  they  have, 
only  in  the  last  emergency  ;  their  ignorance  of,  or 
indifference  to,  the  simplest  laws  of  hygiene — these 
all  tend  toward  a  relatively  higher  death  rate. 


240 

As  to  the  facts,  comparing  the  number  per  thou- 
sand who  die,  according  to  Fare's  English  Life 
Table,  based  upon  the  general  population  of  Great 
Britain,  compiled  from  two  censuses,  with  the  Act- 
uaries' Table,  formulated  from  the  combined  ex- 
perience of  17  English  companies,  and  made  the 
legal  basis  of  computation  in  many  of  the  States 
of  the  Union,  both  being  interpolated  for  age  next 
birthday;  and  these  two  with  the  Metropolitan's 
own  Industrial  Table,  based  upon  12,000,000  in- 
sured lives — we  find  the  following  : 

DEATHS   PER   1,000. 


Age  next 
Birthday. 

Farr. 

Actuaries.  ^ 

Metropolitan . 

20 

7.74 

7.25 

10,52 

21 

8.46 

7.83 

11.56 

25 

9.24 

7.72 

14.14 

35 

11.24 

9.19 

17.15 

45 

14.50 

11.95 

22.56 

55 

21.75 

20.99 

35.22 

65 

41.20 

42.45 

64.51 

70 

60.80 

62.51 

90.99 

I  Slight  variations  will  be  noted  between  the  actuaries'  table  and 
the  one  published  in  Mr.  Fiske's  article  on  Industrial  Insurance  in 
the  Chanties  Review,  which  has  been  widely  circulated,  and  may  fall 
under  the  eyes  of  some  who  will  read  this.  By  an  oversight  the 
table  published  in  the  Review  was  at  the  even  ages  20,  21,  25,  85, 
etc. ,  instead  of  respectively  for  half  a  year  younger  in  order  to  bring 
the  figures  into  comparison  with  the  Metropolitan  table,  which  is 
for  age  next  birthday.  Mr.  Fiske's  argument  is  strengthened  by 
the  correction,  as  of  course  the  mortality  figures  are  lower  than  those 
he  cited. 


241 

While  industrial  mortality  may  be  improving, 
and  while  the  companies  are  doing  what  lies  in 
their  power  to  help  to  ameliorate  existing  condi- 
tions, the  facts  stand  and  we  must  recognize  them, 
not  as  we  would  fain  see  them,  but  as  they  actually 
confront  us.  This  excess  ought  to  be  slowly  re- 
duced as  the  domain  of  the  companies  gradually 
extends  over  the  vast  country  districts  where  con- 
ditions of  life  and  health  are  more  salutary,  coupled 
with  continued  improvement,  already  so  marked 
as  contrasted  with  past  years,  in  the  sanitary  re- 
quirements of  our  large  municipalities. 

THE   INFANTILE   BRANCH   OF   INDUSTRIAL   INSUR- 
ANCE. 

For  some  years  after  the  introduction  of  indus- 
trial insurance  in  this  country  the  infantile  side 
of  it  was  the  subject  of  controversy,  attack  and 
abuse,  as  it  had  been  in  the  old  country,  and  as  it 
is  likely  to  be  in  any  new  locality  into  which  it 
may  be  introduced.  It  is  not,  perhaps,  unnatural 
that  its  novelty  and  nature  should  provoke  some- 
thing akin  to  prejudice  ;  and,  until  its  merits  are 
examined,  that  hostile  forces  be  somewhat  arrayed 
against  it ;  or,  if  received,  that  it  be  with  a  qualified 
welcome — with  heads  shaken,  shoulders  shrugged, 
and  endorsements  written  with  a  slow  hand.  But 
when  it  comes  to  be  probed,  no  business  better  sur- 


242 

vives  the  operation.     In  making  this  statement  we 
are  not  idealizing  ;  we  are  in  the  realm  of  fact,  and 
we  are  only  stating  the  results  of  experience.    One 
of  the  old  objections  was  that  of  Insurable  Interest. 
What  legal  right,  the  critics  asked,  has  a  parent  to 
put  a  money  value  on  a  child's  life  ?    Yet  if  a  trol- 
ley happen  to  kill  or  maim  the  child,  this  question 
is  promptly  relegated  to  the  rear.     A  just  claim 
against  the  railroad  company  for  compensation  is 
recognized  under  such  circumstances,  and  no  slur 
is  cast,  when  recovery  is  sought,  by  imputations 
about  "  making  money  out  of  the  death  of  a  child." 
Going  a  little  further  back,  the  same  feeling  existed 
against  the  insurance  of  a  mother's  life — it  was 
regarded  as  somewhat  of  an  affront  against  good 
morals.    Finally  it  dawned  upon  the  minds  of  most 
people,  that,  in  the  majority  of  the  households  of 
those  of  slender  means,  the  wife  and  mother  was 
the  mainstay,  and  that  an  absolute,  positive,  pecu- 
niary value  inhered    in  her    that    death    would 
wholly  destroy,  and  that  life  insurance  was  justi- 
fied, with  proper  restrictions,  in  recognizing.     Still 
farther  back  the  same  feeling  attached,  strange  as 
it  may  now  appear,  against  even  the  insurance  of 
the  father  of  a  family  ;  and  history  records  public 
ordinances  of  various  countries  prohibiting  and  de- 
claring void  all  life  insurance  contracts  whatsoever. 
Concerning  infantile  life  the   courts  hold  that 


243 

parents  may  recover  damages  for  the  prospective 
value  of  their  child's  services,  even  though  when 
injured  it  be  too  young  to  render  any  service. 
They  hold  that  parents  may  enter  suit  to  recover 
damages  for  the  death  of  a  minor  child,  evidence 
of  specific  or  particular  damage  not  being  essential 
to  recovery.  In  brief,  there  is  assumed  to  be  a 
just  and  reasonable  expectation  of  advantage  or 
benefit  to  a  parent  from  the  continuance  of  a 
child's  life — a  reciprocal  relation,  in  truth  ;  for 
the  parent  is  held  for  the  cost  and  maintenance  of 
his  children  during  their  years  of  dependence — and 
a  proper  justification  inheres  in  the  parent  to  pro- 
tect that  benefit  while  his  child  is  insurable  and 
before  sickness,  accident,  or  other  cause  prevents. 
And  so,  from  the  Supreme  Court  of  the  United 
States  down,  it  has  been  directly  held  that  the  in- 
surable interest  of  a  parent  in  the  life  of  his  child 
is  unquestioned.  These  brief  references  to  the  law 
are  not  designed  as  arguments  for  the  legality  of 
child  insurance,  but  rather  that  we  may  ask  the 
plain,  everyday  man  why,  if  the  death  of  a  child 
by  the  fault  of  another  warrants  a  suit  for  dam- 
ages, that  same  loss  is  not  a  proper  thing  to  pro- 
tect by  life  insurance — within  bounds  ?  We  say 
*'  within  bounds"  because  manifestly  a  business 
of  this  nature  without  bounds — a  business  that  en- 
couraged mere  speculation  in  human  life — that  led 


244 

to  indifference  or  worse  in  the  treatment  of  child- 
ren— that  tended  to  neglect  in  food,  clothing, 
medicine,  and  general  care^such  a  business,  we 
say,  would  be  clearly  against  public  policy,  and 
would  deserve  suppression.  But  if  these  faults 
existed,  it  is  clear  that  the  mortality  among  in- 
sured children  would  be  greater  than  the  mortality 
among  the  children  forming  the  general  popula- 
tion. Instead  of  this,  the  exact  contrary  is  the 
case — the  mortality  of  the  children  insured  is  less 
than  the  mortality  of  the  general  infantile  jiopula 
tion.  This  has  been  proven  by  the  record  of  vari- 
ous companies  across  the  water,  and  by  the  history 
of  the  companies  here,  in  comparing  their  actual 
experience,  first,  with  Fare's  English  life  table, 
compiled  from  the  general  population  of  Great 
Britain,  and  embracing  two  censuses  ;  and,  second, 
with  the  statistics  of  the  United  States  census,  both 
with  respect  to  the  general  population,  and  with 
respect  to  thirty-one  of  the  largest  cities  of  the 
country.  This  comparison,  for  example,  at  the 
lowest  age  (two  years  next  birthday)  shows  the 
Metropolitan  experience  as  49  deaths  per  thousand 
against  Fabr's  65,  and  against  the  United  States 
census  of  57  as  to  the  general  population,  and  87 
as  to  the  31  cities. 

Beyond  the  statistics  of  the  companies,  parlia- 
mentary inquiries  across  the  water  and  legislative 


245 

investigations  here — directed  almost  wholly  against 
the  infantile  side  of  industrial  insurance — have 
been  very  critical  and  very  exhaustive.  In  Great 
Britain  all  the  legislative  action  resulting  from 
successive  reports  has  been  more  and  more  favor- 
able to  the  business.  And  in  this  country,  though 
bills  have  been  introduced  year  after  year  in  dozens 
of  the  States  in  which  the  writer's  company  is 
operating,  and  though  the  business  has  been 
probed  to  the  bottom  by  sundry  legislative  com- 
mittees, no  prohibitive  or  restrictive  measures  in 
any  of  them  beyond  those  formulated  from  the 
Company's  own  rules  of  practice  have  ever  been 
enacted  into  law.  It  may  be  appropriate  here  to 
observe  that  Industrial  Insurance  is  in  reality  what 
it  was  termed  in  the  early  part  of  our  paper,  to 
wit,  FAMILY  Insurance,  and  that  the  business  is 
not,  as  many  seek  to  affirm,  largely  Infantile.  In 
evidence  of  this  we  submit  the  following  table 
compiled  from  the  U.  S.  Census  of  1880  (that 
census  covering  divisions  of  the  younger  ages  not 
found  in  the  later  returns),  comparing  the  same  with 
the  Metropolitan  percentage  of  policies  in  force  : 


Ages. 

Percentage  of 

Population, 

U.  S.  Census 

of  1880 

Metropolitan 

Percentage  of 

Policies  in 

Force. 

5  to  17  inclusive     . 

.     .     30. 

.       28.7 

1  to    9 

.     .     23.82     .     . 

.       21 

1  to  14 

..     36.21     .     . 

.       32 

1  to  20         " 

..     47.42     .     . 

.       44 

246 

This  confirms  our  assertion  that  the  system  is 
one  of  family  insurance  covering  alike  the  wage- 
earner  and  the  wage-consumer — purely  burial  in- 
surance at  the  earlier  ages — life  and  investment 
insurance  at  the  later  ages. 

ALLEGED  TENDENCY  TO  INFANTICIDE. 

Again,  a  favorite  charge  against  the  business 
during  its  earlier  years  was  its  alleged  incentive  to 
infanticide.  But  that  charge  long  ago  died  a 
natural  death.  Its  advocates  had  no  proof,  nor 
anything  that  inferentially  or  conjecturally  bore 
the  semblance  of  i>roof.  The  fiercest  legislative 
fight  through  which  the  business  ever  passed  in 
this  country  essayed  to  start  off  on  that  proposi- 
tion, but  it  was  very  promptly  deserted,  as  there 
was  nothing  to  sustain  it.  In  all  the  annals  of  in- 
dustrial insurance  in  America,  covering  millions 
upon  millions  of  policies,  there  is  just  one  instance 
where  wrongdoing  was  imputed  to  the  business, 
and  that  was  years  ago,  in  Philadelphia,  where  a 
husband  and  two  children  were  poisoned  by  the 
wife  and  mother  for  the  alleged  purpose  of  obtain- 
ing the  insurance  money,  which  amounted  in  the 
aggregate  to  $135 !  This  was  obviously  an  act  of 
insanity — destroying,  as  the  woman  did,  the  very 
life  on  whose  existence  she  depended  for  bread. 
The  most  violent  and  unreasoning  assailant  has 


247 

never  quoted  the  act  of  this  wretch  as  an  indict- 
ment against  infantile  insurance ;  if  he  did  he 
would  have  been  asked  what  about  the  poisoning 
of  the  father,  and  he  would  probably  have  been 
referred,  also,  to  the  experience  of  the  ordinary- 
business  as  partially  collated  in  the  work  entitled 
*'  Stratagems  and  Conspiracies  to  Defraud  Life 
Insurance  ComxDanies."  No;  this  well-worn  libel 
upon  the  mothers  and  fathers  forming  the  in- 
dustrial element  of  the  country  is  happily  at  rest. 
Evidence  of  thrift  on  their  part  is  no  longer  held 
to  betoken  evil  purpose.  In  protecting  their  fami- 
lies against  Potter's  Field  or  from  becoming  ob- 
jects of  charity  it  is  no  longer  affirmed  that  they 
are  simply  concocting  fraud.  The  imputation  that 
providing  a  trifling  sum  against  the  day  of  death 
was  only  seeking  an  opportunity  for  murder  is 
now  buried  too  deep  for  resurrection.  Parental 
affection  certainly  beats  as  warmly  under  the 
mechanic's  blouse  as  under  the  millionaire's 
broadcloth.  And  the  thirty  thousand  men  en- 
gaged in  the  business  are  no  longer  held  up  as 
accessories  to  crime — that  day  is  past. 

COST   OF   INFANTILE  INSURANCE. 

Again,  the  tax  upon  the  parent — the  cost  of 
infantile  insurance — was  also  urged  as  unwarrant- 
able.    In  fact,  some  called  it  a  waste.     But  why  ? 


248 

Why  as  to  children  more  than  as  to  adults  ?  Both 
have  to  die.  Money  is  needed  to  bury  the  one  as 
well  as  the  other.  The  old  habit  was  to  pass 
around  the  hat  and  take  up  a  collection  when 
death  entered  the  home  of  the  workman.  This 
was  bemeaning  and  degrading.  Industrial  insur- 
ance came  to  teach  self-help — that  the  man  of 
slenderest  means  had  it  within  his  power  to  be 
Independent  of  beggary  and  to  stand  on  his  own 
resources.  From  this  influence  thrift  has  radiated 
in  other  directions.  One  of  the  contentions  made 
in  the  celebrated  Massachusetts  contest  was  that 
contributions  made  to  industrial  insurance  had 
grown  side  by  side  with  the  increase  in  savings- 
bank  deposits,  and  it  was  conclusively  shown. 
The  companies  have  with  them,  in  this  matter  of 
educative  influence,  the  judgment  of  many  of  the 
most  eminent  workers  in  the  ranks  of  public 
charity  throughout  the  country. 

Allied  to  this  is  the  charge  of  extravagant 
funerals.  This  charge  will  probably  stand  as  long 
as  human  nature  exists.  It  is  the  common  instinct 
of  humanity.  It  has  been  the  policy  of  every 
religion  and  of  all  peoples  to  surround  the  dis- 
posal of  the  dead  with  circumstances  of  ceremony 
and  expenditure.  If  there  is  any  sentiment  im- 
bedded in  the  human  heart,  it  is  respect  for  the 
dead,  and  that  respect  is  found  nowhere  stronger 


249 

than  among  those  in  the  lowly  walks  of  life.  That 
its  expression  goes  at  times  beyond  the  means  of 
the  surviving  relatives  may  be  admitted.  But  the 
claim  that  infantile  insurance  fosters  this  gener- 
osity is  nonsensical.  Quite  to  the  contrary.  In 
the  company  with  which  the  writer  is  associated 
we  have  made  careful  investigations  as  to  all  the 
infantile  benefits  paid  over  a  consecutive  number 
of  months  or  weeks,  embracing  thousands  of 
claims,  and  we  have  found  that  in  8Q  per  cent, 
of  the  cases — nearly  nine-tenths — the  expenses  of 
sickness  and  burial  exceeded  the  money  derived 
from  the  policies.  The  average  amount  paid  on 
infantile  claims  during  the  year  1897  by  the  largest 
industrial  company  in  this  country  was  $25.83. 
If  there  is  any  over-expenditure  in  this  branch  of 
the  work,  it  should  be  charged  where  it  belongs, 
and  not  against  a  system  whose  provisions  fall 
short  of  the  outgoes  actually  incurred. 

Yes,  the  companies  would  like  to  reduce  the 
cost,  and  they  are  leaving  nothing  undone  in  that 
direction  consistent  with  absolute  security  and 
safety;  and  this  may  be  evidenced  by  the  fact  that 
industrial  premiums  are  now  so  closely  calculated 
that  if  the  premiums  on  the  policies  now  in  force 
were  reduced  one  cent  each  per  week,  it  would,  if 
continued,  send  the  companies  to  bankruptcy  in 
less  than  five  years  ! 


250 


LAPSES. 


Our  concluding  point,  along  this  line,  is  the 
criticism  sometimes  indulged  in  about  lapses — 
that  because  the  lapse  ratio  is  high  the  policy- 
holders are  losers  and  the  companies  great  gainers. 
The  truth  is,  the  companies  wish  there  were  no 
lapses ;  they  would  like  to  have  all  the  business 
they  ever  wrote  remain  in  force,  and  they  have 
done  everything  that  thought  and  ingenuity  can 
devise  to  stop  them.  The  method  of  compensating 
agents,  in  nearly  all  the  companies,  strikes  at  the 
very  root  of  this  matter.  The  heaviest  charge,  as 
in  all  life  insurance,  is  the  agent's  first  commis- 
sion for  procuring  the  business.  He  is  then  paid  a 
collecting  fee  based  upon  the  actual  amount  of 
premiums  turned  in.  Bat  his  first  and  larger  com- 
mission is  not  based  (except  qualifiedly,  as  will  fol- 
low) upon  the  amount  of  business  he  introduces ; 
if  it  were,  there  would  be  a  manifest  inclination  to 
be  willing  to  see  it  lapse,  that  it  might  be  rewritten 
and  another  commission  obtained,  and  this  proced- 
ure be  repeated  to  the  detriment  of  the  company. 
This  commission  is  only  paid  upon  INCREASE — 
upon  the  growth,  or  increase,  of  his  premiums  from 
week  to  week.  For  illustration  :  if  his  total  pre- 
miums on  new  business  secured  within  a  given 
week  are  one  dollar  and  the  lapsed  premiums  on 


251 

business  previously  written  are  fifty  cents,  he  is 
not  paid  on  the  dollar  of  business  introduced,  but 
on  the  difference,  or  increase,  of  fifty  cents.  This 
plan  also  works,  as  is  obvious,  as  something  of  a 
safeguard  against  a  poor  quality  of  business — a 
business  obtained  by  any  means  that  make  against 
its  permanency  and  persistency.  The  more  rapid 
its  waste,  the  more  frequent  and  irksome  the  bur- 
den upon  the  agent.  When  the  thoughtless,  or 
the  ignorant,  therefore,  charge  the  companies,  as 
some  have  recklessly  done,  with  the  encourage- 
ment of  forfeitures,  they  utter  a  monstrous  un- 
truth. They  affirm  that  gain  arises  from  lapses- 
contending  that  the  companies  turn  into  surplus 
the  reserves  on  forfeited  policies  theretofore 
charged  up  as  a  liability.  This  presupposes  that 
the  reserves  have  been  earned  before  being  thus 
converted.  Suppose,  for  simplicity  and  clearness, 
that  we  define  a  reserve  as  a  sum  necessary  to 
keep  a  premium  level — the  too-much  charged  in 
the  earlier  years  of  a  policy  to  offset  the  too-little 
charged  in  later  years.  In  one  of  the  legislative 
investigations  it  was  shown  from  the  books  of  one 
of  the  largest  companies  that  at  the  end  of  the  first 
year  industrial  policies  showed  a  loss  of  290  per 
cent,  of  their  reserve — that  the  second  year  they 
had  made  up  only  25  per  cent,  of  the  reserve 
liability — the  third  year  they  had  made  up  but  52 


252 

per  cent. — and  that  it  was  the  fourth  year  before 
the  company  made  its  reserve  liability,  let  alone 
any  profit.  The  records  of  our  business  show  that, 
of  the  business  issued  on  a  given  date,  over  70  per 
cent,  is  lapsed  during  the  three  years  next  succeed- 
ing. Of  these  lapses  more  than  one-half  occur  dur 
ing  the  first  three  months  of  the  i^olicy,  and  six- 
sevenths  during  the  first  year  of  the  policy  !  Can 
anything  but  a  dead  loss  be  figured  on  these 
lapses?  As  matter  of  fact,  the  last  calculation 
made  by  the  writer's  company,  relating  to  the 
experience  of  the  year  1896,  showed  the  pecuniary 
loss  that  year  by  lapses  to  be  $813,000 ! 

Let  us  look  at  some  of  the  obvious  reasons. 
First,  there  are  fifty-two  opportunities  in  the  year 
for  the  lapsing  of  an  industrial  policy — as  the  pre- 
miums are  payable  weekly,  as  against  one,  two,  or 
at  the  most  four  temptations  a  year  (premiums 
being  paid  annually,  semi-annually,  or  quarterly) 
in  the  ordinary  companies.  Next  consider  the 
differences  in  the  people,  pecuniarily  and  otherwise, 
among  whom  these  respective  forms  of  insurance 
are  done.  Further,  bear  in  mind  the  nature  of  the 
lapse.  In  the  ordinary  company  it  is  permanent — 
the  policy-holder  going  out  being  apt  to  stay  out ; 
if  he  take  up  other  insurance,  he  is  persuaded  into 
some  other  company  ;  if  he  is  dissatisfied  with 
dividends,  or  other  cause,  he  applies  for  a  paid-up, 


253 

or  a  surrender  value,  and  (whether  he  gets  it  or  not) 
he  withdraws  and  ends  his  relation  as  to  that  com- 
pany. The  industrial  policy-holder,  on  the  con- 
trary, goes  out  and  comes  back.  He  lapses  and  re- 
enters. A  shutting  down  of  the  mill,  a  fire,  a 
strike,  his  discharge,  the  failure  of  an  employer — 
a  hundred  things,  conspire  to  cut  off  his  resources. 
He  exhausts  his  grace,  and  if,  for  the  time  being, 
he  is  unable  to  go  on,  applies  for  a  paid-up  (if  he 
is  entitled  to  it)  and  stops.  Regaining  employ- 
ment, he  comes  back — and  all  his  family  with  him. 
Another  disturbance,  and  the  same  result  follows. 
Starting  afresh,  or  reviving  his  former  policies  (all 
of  which  counted  as  lapses),  he  again  rejoins  the 
ranks  of  the  insured.  Any  comparison  of  the 
lapses,  therefore,  in  the  two  forms  of  business  is 
wholly  irrelevant.  But  what  do  statistics  show  as 
to  the  actual  experience  of  the  ordinary  companies 
as  compared  with  that  of  the  industrials  ?  Taking 
the  last  five  years,  the  total  insurance  lapsed  in  the 
ordinary  companies  was  78  per  cent,  of  the  amount 
written  within  that  period.  The  industrial  com- 
panies over  the  same  five  years  showed  75  per  cent. 
For  last  year,  1897,  the  figures  stand  as  73  per  cent, 
in  the  case  of  the  ordinary  companies  to  d5  per 
cent,  in  the  industrials  ! 

But  ''Hold!"  says  some  particularist,  "that's 
hardly  fair.     Dealing  with  such  an  immense  aggre- 


254 

gation  of  small,  individual  insurers,  your  ratio 
ought  to  be  less."  Well,  should  it  ?  The  ordinary 
insurer  is  a  man  of  a  fixed  or  assured  income,  or 
some  approach  to  it.  The  industrial  insurer  is  one 
generally  dependent  upon  daily  or  weekly  wages. 
The  occurrences  as  to  nature  and  number  affecting 
each  we  have  barely  hinted  at.  In  times  of  business 
disturbance  mills  shut  down,  trade  is  suspended, 
employers  fail.  Where  hundreds  or  even  thousands 
of  employers  may  be  thus  affected,  tens  and  hun- 
dreds of  thousands  of  the  employed,  the  country 
over,  are  deprived  of  work  and  of  wages.  A  fire  in 
a  large  refinery  threw  2500  men  out  of  employment 
in  one  night.  It  made  no  difference  in  the  scale  of 
expenditure  to  the  half-dozen  men  who  owned  it — 
none  whatever.  It  did,  however,  to  the  families  of 
these  2500  workmen.  The  former  collected  their 
fire  insurance  and  went  on  and  rebuilt.  The  lat- 
ter waited — many  of  them — till  the  rebuilding  was 
done  and  they  could  go  to  work  again.  From  a  Phil- 
adelphia paper  we  read  :  '  *  The  woolen  mills  of 

have  been  shut  down  and  ten  thousand  working- 
men  are  without  employment.  The  proprietor 
says  he  can  buy,  while  the  raw  material  is  so  dear, 
cheaper  than  he  can  manufacture,  etc."  The  shut- 
ting down  of  this  mill  meant  little  to  the  owner — 
by  his  own  admission,  in  fact,  he  was  benefited. 
He  probably  laughed  at  the  necessity  of  lapsing  his 


255 

life  insurance  by  reason  of  it ;  but  how  about  the 
industrial  policies  among  the  30,000  or  more  per- 
sons represented  by  these  10,000  working  people  ? 
To  sum  up,  there  is  no  force  to  this  contention, 
but  everything  against  it ;  and  it  is  only  fair  to 
expect  that  the  nominal  ratio  of  lapses  in  indus- 
trial insurance  should  appear  large,  for,  as  the  brief 
facts  we  have  barely  touched  upon  testify,  it  re- 
sults from  natural  causes,  only  partly  preventable. 

PEACTICAL  IMPROVEMENTS    IN   THE    OPERATION     OF 
INDUSTRIAL   INSURANCE. 

There  is  much  of  meaning  and  significance  in 
the  work  done  by  industrial  insurance  in  this 
country,  as  we  have  here  briefly  sought  to  outline 
it.  First,  it  bears  unquestioned  evidence  to  the 
fact  that  a  legitimate  demand  has  existed  among 
the  great  mass  of  industrial  people  throughout  the 
United  States  for  some  reliable  form  of  family 
insurance  adapted  to  the  slender  means  at  their 
command.  Energy  and  skill  may  do  much  toward 
making  a  demand  apparent ;  they  may,  for  a  time, 
make  things  appear  natural  that  are  purely  arti- 
ficial. But  they  cannot  maintain  an  abiding  and 
increasing  growth — they  cannot  command  perma- 
nent prosperity — unless  the  service  in  which  they 
are  invoked  is  a  righteous  one  ;  unless  the  demand 
they  seek  to  supply  honestly  exists  ;  unless  the  con- 


256 

fidence  they  invite  is  fairly  deserved.  Next,  it  may, 
we  think,  be  justly  claimed  on  behalf  of  the  suc- 
cessful industrial  companies,  that  they  have  been 
administered  with  sound  judgment,  with  tireless 
industry,  and  with  undoubted  integrity  ;  in  brief, 
that  they  have  merited  the  confidence  that  has  been 
accorded  them.  Still  further,  the  value  of  the  im- 
petus it  has  given  to  the  spirit  of  frugality  and 
saving— of  voluntary,  not  compulsory,  thrift — es- 
pecially among  that  portion  of  the  community  to 
which  these  virtues  are  supremely  valuable,  cannot 
be  over-estimated.  Although  the  business  is  com- 
paratively young  in  this  country,  the  outstanding 
policies  already  far  out-number  the  aggregate  de- 
positors in  all  the  savings  banks  of  the  United 
States — and  if  to  these  depositors  be  added  all  the 
policy-holders  in  the  ordinary  life  insurance  com- 
panies, the  preponderance  would  still  be  in  favor 
of  industrial  insurance  !  There  is  suggestion  and 
assurance  of  marked  social  improvement  in  all  this 
— of  an  educating,  uplifting  principle  that  compels 
recognition,  that  commands  respect  and  that  de- 
serves encouragement. 

In  proof  of  this  contention  we  may  affirm  that, 
80  soon  as  the  business  could  be  deemed  fairly 
established  in  this  country,  concessions  to  the 
policy-holders  began  to  be  made,  and  every  year 
has  borne  witness  to  progressive  liberality  in  this 


257 

direction.  Features  have  been  adopted  which  would 
have  been  destructive  of  the  business  in  its  forma- 
tive period.  I  may  be  pardoned  for  a  few  illus- 
trations, which  I  will  cull,  if  you  please,  from  the 
experience  of  the  company  with  which  I  am  iden- 
tified ;  simply  saying  that  the  same  spirit,  though 
not,  perhaps,  in  all  respects  to  the  same  extent,  has 
animated  the  executives  of  a  number  of  the  other 
companies,  some  of  whom  (and  I  say  it  with  entire 
candor)  may  even  regard  their  own  concessions 
as  equal,  and  perhaps  superior.  Among  the  first 
important  innovations  was  the  granting  of  paid-up 
policies,  applicable  to  all  adult  insurances  in  force 
five  years  from  January  1,  1892.  To  encourage 
these  the  company  ruled  that  the  agents  should 
in  their  compensation  not  be  charged  with  pol- 
icies lapsed  in  order  to  obtain  paid-up  policies. 
Later,  immediate  benefits  on  endowment  policies 
were  increased.  Subsequently,  when  the  first  panic 
struck  the  business,  and  mills  and  factories  were 
closed,  general  business  was  prostrated  and  the 
industrial  classes  throughout  the  country  were 
deprived  of  employment,  lapses,  in  large  numbers, 
supervened.  To  meet  the  hardship  thus  imposed, 
upon  the  policy-holder,  so  soon  as  good  times  be- 
gan to  dawn,  we  offered  to  reinstate,,  in  full  imme- 
diate benefit,  all  the  lapsed  policies  throughout 
the  country,  a  year  old,  the  forfeiture  of  which  had 


258 

been  produced  by  tlie  pressure  of  hard  times  ; 
further,  to  all  whose  policies  were  five  years  old 
(although  the  system  of  paid-up  policies  was  not, 
at  the  time,   actually  operative),  who  had  been 
forced  to  drop  out  by  stress  of  circumstance,  a 
paid-up  policy  was  offered  without  restriction  ;  or, 
in  lieu,  a  new  policy  without  medical  examination, 
in  full  immediate  benefit,  and  without  the  payment 
of  a  penny  in  arrears.     Many  thousands  of  renewal 
and  paid-up  policies  were  called  for  as  a  result  of 
these  offers.      In  the  several  periods  of  industrial 
depression  since,  like  liberality  has  been  promptly 
extended.     Later,  the  paid-up  privileges  were  ex- 
tended and  made  applicable  to  all  existing  policies, 
in  force  a  prescribed  time,  that  were  ever  issued  by 
the  company.     Following  this,  a  material  increase 
was  made  in  the  amounts  of  these  paid-up  insur- 
ances.    And  later  still  a  valuable  concession  to  pre- 
vent lapses  has  been  made  by  the  writer's  com- 
pany.     Whenever  a  policy  lapses  after  being  five 
years  in  force,  the  home  ofiice  addresses  a  personal 
letter  to  the  holder  offering  him  the  option  of  (1)  a 
paid-up  policy  according  to  the  company's  rules; 
or  (2)  the  whole  reserve  on  his  policy  to  be  credited 
in  payment  of  weekly  premiums  as  far  as  it  will  go 
upon  a  new  policy,  in  full  immediate  benefit,  for  an 
amount  which  his  old  rate  of  premium  will  pur- 
chase at  present  age,  without  medical  examination 


259 

and  with  privilege  of  continuance  at  the  expiration 
of  this  extension  of  his  insurance.  Again,  the  pul- 
monary and  consumption  clause — under  which 
death  from  these  causes,  within  the  first  year  of  the 
policy,  produced  but  half  the  amount  otherwise 
payable — was  eliminated,  and  the  elimination  was 
made  retroactive,  i.  e.,  applicable  to  all  the  policies 
in  force.  The  form  of  policies  was  greatly  improved 
by  omitting  the  warranty  in  the  applications  for 
policies  not  large  enough  in  amount  to  call  for  reg- 
ular medical  examinations.  The  whole  contract 
was  contained  in  the  policy  itself,  which  was  avoided 
only  in  case  of  the  insured  having  had  a  disease  not 
mentioned  in  the  blank  space  provided  in  the  pol- 
icy— a  space  large  enough  to  attract  attention. 
And  to  protect  the  holder  from  the  consequence  of 
oversight  or  misunderstanding,  he  was  given  the 
right,  within  two  weeks  after  receiving  his  policy, 
to  return  the  same  and  take  back  the  premiums 
paid.  Next,  increased  benefits  were  granted  on  in- 
fantile policies — at  some  ages  doubling  the  insur- 
ance—with no  increase  of  premium,  and  this  was 
also  made  retroactive  as  to  old,  existing  policies. 
Then,  new  endowment  tables,  both  infantile  and 
adult,  were  adopted,  and  by  them  it  was  provided 
that  the  paid-ups,  issuable  thereunder,  should  be 
paid-up  endowments.  Six  months  later  a  guaran- 
teed dividend  was  added  to  the  adult  table,  pro- 


260 

viding  that,  after  the  policy  was  three  years  old, 
there  would  be  added  to  the  amount  of  the  insur- 
ance, at  each  anniversary  of  its  date,  while  in  force, 
a  sum  equal  to  ten  weeks'  premium,  the  same  to 
follow  the  original  policy,  that  is,  to  be  payable  at 
death  or  at  the  end  of  the  endowment  term.     The 
same  dividends  were  guaranteed  to  all  infantile 
endowments  after  the  insured  reached  the  age  of 
twelve.      It  will  be  perceived  that  this  is  a  positive 
guaranty  of  an  annual  reversionary  dividend  of  20 
per  cent,  of  the  premiums  for  a  year.      About  the 
same  date  the  company  began  the  issue  of  what  it 
designates  as  Intermediate  Policies,  for  $500,  at 
low  rates  of  premiums,  both  for  life  and  endow- 
ment, the  company  agreeing  to  keep  account  of 
these  policies  by  themselves,  and  to  pay  dividends, 
after  five  years,  according  to  the  earnings  of  that 
class  of  policies ;  such  policies  being  designed  for 
those  to  whom    the  ordinary  policies  for    large 
amounts  were  impracticable,  and  who  yet  desired  a 
policy  more  advantageous  than  on  the  weekly  pre- 
mium plan.     At  the  end  of  1896,  although  under 
no  legal  obligation  by  contract  or  precedent  to  pay 
a  dollar,  a  dividend  which  cost  the  company  more 
than  $500,000  was  declared,  and  this  was  followed 
by  the  allotment  of  a  like  sum  for  the  present  year. 
At  the  beginning  of  '97  the  Whole-Life  Infantile 
table  was  abolished  and  all  the  Infantile  policies 


261 

thereafter  issued  were  made  endowment  policies. 
On  them  an  annual  reversionary  dividend  of  20  per 
cent,  of  the  premiums  for  a  year  is  guaranteed 
after  the  insured  reaches  the  age  of  twelve.  As  we 
took  occasion  to  remark  in  an  earlier  part  of  our 
paper,  the  great  bulk  (about  96  per  cent.)  of  all  the 
business  now  being  written  by  the  company  to 
which  I  am  related  contains  the  endowment  feat- 
ure, so  that  the  antique  and  senseless  imputation 
of  having  to  die  to  win  is  pointless,  and  the  question 
of  old-age  provision,  which  is  agitating  other  coun- 
tries as  a  public  measure,  we  are  doing  something 
in  our  way,  to  meet.  During  the  recent  war  with 
Spain  the  industrial  insured  could  enter  the  mili- 
tary or  naval  service  of  the  United  States  without 
restriction  and  without  extra  costs.  This  applied 
alike  to  policies  outstanding  when  hostilities  were 
declared,  irrespective  of  whether  or  no  the  policies 
contained  a  war-clause,  and  to  all  policies  issued  or 
revived  during  the  continuance  of  the  war.  The 
internal  revenue  tax  was  also  paid  by  the  com- 
pany and  not  charged  against  the  individual  policy- 
holder. The  same  conditions  applied  to  its  ordi- 
nary business.  In  other  words,  the  war  made  no 
difference  whatever  in  the  relations  of  the  assured 
to  the  company,  either  as  to  freedom  of  action  or 
to  the  cost  of  the  insurance.  Finally  (as  to  this 
branch  of  the  subject),  all  our  Industrial  policies 


262 

now  provide  that  if  their  terms  are  not  satisfactory 
to  the  assured,  or  if  the  conditions  are  not  accepted 
and  agreed  to,  the  policy  may,  within  two  weeks, 
be  returned  to  the  company,  and  all  the  premiums 
paid  will  be  refunded.  This  gives  an  opportunity 
to  correct  misunderstandings,  if  any,  and  to  obvi- 
ate future  causes  of  just  complaint.  Death  claims, 
which  now  average  in  the  single  company  spoken 
of,  about  200  in  number  per.  day,  are  paid  by  tele- 
graph as  to  all  outlying  localities,  and  by  messenger 
or  mail  to  points  contiguous  to  the  home  office — 
in  either  event  action  being  taken  immediately 
upon  receipt  of  proofs. 

GOVERNMENT   INSURANCE   IN   GREAT   BRITAIN. 

Reverting  again  to  the  general  subject  of  in- 
dustrial insurance,  and  to  matters  more  or  less 
collateral  thereto,  brief  reference  may  not  be  in- 
appropriate to  the  plan  of  Government  Insurance 
in  Great  Britain,  instituted  under  the  Gladstone 
Ministry  in  1864,  for  which  wonderful  success  was 
confidently  predicted.  The  amounts  to  be  insured 
were  from  $100  to  $500,  applicable  to  ages  16  to  60 
inclusive.  The  premiums  were  due  fortnightly, 
monthly,  quarterly  or  annually,  payable  at  some 
9000  selected  post  offices,  where  applications  could 
be  made  and  policies  obtained.  The  latest  avail- 
able returns  showed  9065  policies  in  force,  insur- 


263 

ing  less  than  three  millions  of  dollars  !  This  was 
the  result  of  29  years'  operations  !  The  cause  of 
this  failure  may  be  attributed  variously  :  the  mini- 
mum limit  of  insurance  and  the  minimum  age  are 
both  too  high  to  meet  the  wants  of  the  Industrial 
classes  for  whom  the  plan  was  designed  ;  the  num- 
ber of  selected  post  offices  is  too  small,  and  the- 
formalities  required  (as  in  all.  Government  per- 
formances) too  complicated.  But  the  main  reason 
has  been  the  absence  of  personal  motive  and  effort 
on  the  part  of  the  Government  officers — in  other 
words,  the  lack  of  an  agressive  agency  system. 
Both  the  private  companies  and  the  Friendly 
Societies  enlist  members,  either  through  energetic 
agents  in  the  interests  of  pure  business,  or  through 
"brothers"  in  the  interests  of  companionship  and 
mutual  help.  This  Government  plan  has  failed  in 
not  going  for,  and  seeking  out,  the  customer  and 
then  delivering  the  goods  at  his  door — features 
that  seem  imperative  to  all  modern  life  insurance, 
wholesale  or  retail,  but  especially  to  the  retail, 
and  that  are  to  be  credited  with  the  immense  de- 
velopment of  life  insurance  in  the  United  States. 
A  great  engineer  was  wont  to  say  that  an  invention 
which  was  no  one's  property  was  useless  to  man- 
kind ;  but  give  a  man  an  interest  in  it — tell  him  to 
make  his  living  out  of  it — and  he  busies  himself  in 
urging  its  merits,  in  adapting  it  to  the  require- 


264 

ments  of  trade,  and  in  presenting  it  in  a  salable 
form  to  the  public. 

INDUSTRIAL  INSURANCE  IN  OTHER  COUNTRIES. 

As  to  the  practice  of  industrial  insurance  and 
plans  related  thereto  in  other  countries,  in  order  to 
serve  this  convention  as  efficiently  as  possible  we 
have  corresponded  with  most  of  the  countries  of 
the  world,  and  we  remark,  briefly,  as  follows  : 

In  France,  we  are  advised,  Industrial  insurance 
as  practised  in  this  country  and  Great  Britain  does 
not  exist.  It  was  introduced  a  few  years  ago,  but, 
after  a  short  trial,  was  abandoned.  They  have 
Friendly,  or  Assessment,  Societies,  giving  members 
an  indemnity  in  the  event  of  sickness,  an  annuity 
for  old  a^e,  and  in  some  cases  a  small  provision  in 
case  of  death.  These  societies  are  local  in  their 
operations,  and,  in  general,  are  limited  to  particu- 
lar trades.  Statistics  and  other  information  of 
value  are  not  obtainable.  It  is  rumored  that  one 
of  the  leading:  life  insurance  companies  of  France 
is  now  considering  the  introduction  of  this  business 
in  that  country,  and  has  recently  had  its  represent- 
atives in  London,  studying  the  operations  of  the 
British  industrial  companies. 

In  Holland  the  business  exists  but  without  offi- 
cial supervision  and  without  the  publication  of  an- 
nual statements  or  other  returns.     A  large  number 


265 

of  Burial  Insurance  Companies,  so  called,  are  also 
in  operation. 

In  Italy  industrial  insurance  is  unknown.  It 
was  attempted  a  few  years  ago  by  a  local  Life  In- 
surance Company,  but  was  soon  abandoned.  The 
conditions  are  not  favorable  to  its  establishment  in 
that  country,  mainly  because  the  burial  expenses 
of  persons  of  inadequate  means  are  provided  by  the 
various  municipalities  throughout  the  Kingdom. 

In  SwEDEis"  the  business  exists,  but  age  10  is  the 
minimum  age  insured.  The  transactions  of  the 
companies  are  meager.  They  have  also  some  four 
hundred  societies,  or  orders,  combining  sick  bene- 
fit with  burial  insurance. 

In  Switzerland  the  business  has  a  foothold, 
being  transacted  by  four  companies.  There  are 
also  a  number  of  small  and  (principally)  local  As- 
sessment Societies,  providing  death  benefits.  These 
associations  are  not  subject  to  public  control. 

In  the  Russian'  Empire  industrial  insurance  is 
unknown,  the  nearest  approach  to  it  being  a  form 
of  burial  insurance  practised  by  four  companies. 

In  Denmark  we  find  one  industrial  company 
now  in  operation  and  another  contemplated.  The 
former  has  been  working  since  July,  1896,  and  has 
in  force  some  12,000  policies. 

In  Spain  industrial  insurance  is  not  transacted, 
but   Societies  confined  to  particular  trades  exist, 


266 

which,  for  monthly  dues,  provide  medical  aid, 
medicine  and  sick  allowance,  and  a  provision  for 
burial  expenses. 

In  Hungary  a  form  of  industrial  insurance 
has  been  in  operation  by  the  Life  and  Accident 
Companies  for  some  fifteen  years,  and  is  reported 
as  having  materially  increased  in  extent  during  the 
last  ^ve  years.  Statistics  are  not  procurable  show- 
ing the  results  attafined.  In  every  large  town  there 
are  also  local  Burial  Associations. 

In  Servia,  and  in  the  countries  of  the  Orient, 
the  business  is  as  yet  unknown. 

In  Austria  industrial  insurance  exists  in  a 
small  way.  'No  home  company  was  in  operation 
there  at  the  beginning  of  this  year,  but  for  three 
years  past  the  Victoria  of  Berlin  has  done  an  Indus- 
trial business  in  Austria.  Its  last  available  report 
(1896)  shows  an  income  from  its  Industrial  business 
of  about  $42,000.  The  number  of  policies  in  force 
and  the  outstanding  insurance  are  not  obtainable. 
A  company  recently  established  in  Vienna,  the 
''  Universal,"  is  likewise  doing  industrial  insurance 
in  connection  with  it«  Ordinary  life  work,  but  no 
^figures  of  its  operations  are  at  hand.  In  January 
of  this  year  a  company  was  also  organized  under 
the  supervision  of  the  ''Landtag"  (the  Provincial 
Legislature),  and  the  publications  of  this  company 
show  that  it  purposes  doing  an  Industrial  form 


267 

of  life  insurance.  There  are  a  great  number  of 
Societies  in  each  town  or  province,  limiting  their 
operations  to  special  trades  or  occupations  and 
providing  a  burial  fund  of  from  $40  to  $300.  No 
public  reports  are  issued,  and  they  are  subject  to 
the  supervision  of  the  police  or  the  Governor  of  the 
Province. 

In  Belgium  Industrial  Insurance  is  found,  be- 
ing worked  by  one  Dutch  and  two  Belgian  com- 
panies ;  the  only  one,  however,  pushing  the  work 
seriously  being  the  Dutch  company  "  L' Utrecht." 

In  Germany  we  are  informed  that  34  companies 
are  transacting  Industrial  Insurance,  having  in  force 
at  the  close  of  1897,  2,390,962  policies,  insuring  112,- 
359,800,  or  an  average  per  policy  of  $47.  Burial  in- 
surance is  also  in  vogue,  one  of  the  largest  of  the 
companies  reporting  some  $13,000,000  of  insurance 
in  force. 

From  Turkey,  Portugal,  Norway  and  Bul- 
garia our  inquiries  have  been  unanswered. 

In  Canada  the  last  Insurance  report  showed 
77,042  Industrial  Policies  in  force,  representing 
$8,184,713  of  Insurance.  Two-thirds  of  this 
amount,  however,  is  to  be  credited  to  the  Metro- 
politan of  New  York — the  only  United  States  com- 
pany transacting  this  form  of  business  in  the  Do- 
minion. There  is  one  other  organization,  limiting 
its  operations  to  the  province  of  Quebec,  and  thus 


268 

outside  the  supervision  of  the  Canadian  Insurance 
Department,  whose  premium  income  is  about  $100,- 
000  yearly  ;  having  29,530  policies  in  force,  insuring 
$2,216,636. 

In  India,  China,  Java,  The  Straits  Settle- 
ments and  Si  AM  Industrial  insurance  is  unknown. 

The  same  as  to  the  South  American  Republics  of 
Uruguay,  Paraguay  and  Argentina,  except 
that  among  the  Italian  communities,  which  form 
the  largest  foreign  element  in  those  countries,  there 
are  several  private  institutions  or  Friendly  Societies, 
of  which  no  published  reports  as  to  results  are  ac- 
cessible. 

The  same  also  as  to  Peru,  Ecuador  and  Bo- 
livia, of  Chili  and  Brazil,  of  Guatemala,  Costa 
EiOA,  CuRACOA,  of  The  United  States  of  Colom- 
bia, Venezuela,  San  Salvador,  Honduras  and 
Nicaragua. 

In  the  West  Indies,  including  British,  Dutch 
and  French  Guiana,  there  are  Friendly  Societies,  or 
branches  of  them,  such  as  the  Independent  Order 
of  Odd-Fellows  and  the  Ancient  Order  of  Foresters, 
and  a  number  of  local  societies  (162  of  such  societies 
having  been  registered  up  to  January  1,  1898),  but 
the  Registrar's  returns  give  no  idea  of  the  extent 
of  their  operations. 

In  Trinidad  an  American,  formerly  connected 
with  one  of  the  United  States  companies,  has  re- 


269 

cently  started  an  industrial  company,  known  as  the 
''Sunbeam  Benefit  Society,  Limited,"  providing 
benefits  for  sickness,  accident  and  death,  with  pre- 
miums payable  weekly  or  monthly.  It  is  reported 
as  working  purely  on  American  lines,  and  it  may 
therefore  be  heard  from  in  the  future. 

In  the  Bermudas  are  two  local  Societies,  one  for 
whites  and  one  for  blacks  paying  such  death  bene- 
fits as  an  assessment  of  4  shillings  sterling  upon  the 
members  may  produce. 

From  Cuba  and  Porto  Rico  the  facts  were  un- 
obtainable by  reason  of  the  recent  embargo  upon 
correspondence. 

From  British  Honduras  we  are  unadvised. 

In  Mexico  Industrial  insurance  is  unknown. 

In  Australasia  several  companies  are  operating, 
and  various  attempts  have  been  made  by  still 
others,  but  they  have  resulted  in  failure.  The 
Citizens'  is  the  only  company  doing  any  business 
worthy  of  mention.  202, 335  policies  are  reported  to 
ns  as  in  force,  the  equivalent  of  about  $24,000,000 
of  Insurance,  or  an  average  of  $118  per  policy. 
Some  of  the  English  Friendly  Societies  such  as  the 
Manchester  Unity,  have  branches.  Sick  benefit 
and  burial  insurance  organizations  also  exist,  pro- 
viding medical  attendance,  sick  pay,  burial  allow- 
ance and  a  gratuity  of  $50  to  a  member  on  the 
death  of  his  wife. 


270 

From  an  Australian  journal  we  are  also  in- 
formed that  the  Industrial  Life  Insurance  Company 
of  South  Africa  has  begun  operations,  but  its  re- 
sults thus  far  are  insignificant. 

In  all  of  the  countries  thus  referred  to  the  ordi- 
nany  business  of  Life  Insurance  is  transacted  by 
one  or  more  of  the  Companies  of  the  United  States. 

It  will  thus  be  observed  that  in  many  of  the 
countries  the  seed-plant  of  Industrial  Insurance 
exists  in  the  form  of  Friendly  Societies,  Burial 
Clubs  and  the  like,  and  from  these  will  emerge,  in 
due  time,  organizations  based  upon  scientific  and 
reliable  data  such  as  have  marked  the  develop- 
ment of  the  more  progressive  countries. 

COMPULSORY   INSURANCE,  ETC. 

Again,  as  related  to  our  general  theme,  a  cursory 
glance  may,  perhaps,  be  admissible  at  the  move- 
ment in  many  countries  toward  schemes  of  insu- 
rance among  wage-earners,  embracing  provisions  for 
Old  Age,  Sickness,  Accident,  etc.  Along  this  line 
we  find  in  various  European  countries  Compulsory 
State  Insurance  where  the  State  practically  takes 
over  the  insurance  business,  so  far  as  the  working 
classes  are  concerned,  and  makes  it  a  branch  of  the 
regular  operations  of  the  Q-overnment,  making  it, 
not  optional,  but  obligatory  upon  the  classes  it 
seeks  to  benefit.     Germany,  Austria,  France  and 


271 

Roumania  have  such  systems.  Then  there  is  the 
system,  next  most  prominent,  of  Voluntary  State 
Insurance,  by  which  the  State  endeavors,  by  the 
creation  of  suitable  institutions  and  the  offering  of 
special  inducements,  to  lead  the  working  classes  to 
voluntarily  insure  themselves — a  policy  identical 
with  that  which  has  dictated  the  creation  of  national 
systems  of  Savings  Banks.  The  best  examples  of 
these  are  in  France,  Italy  and  Belgium.  Next  fol- 
lows a  system  of  institutions  privately  organized, 
but  controlled  and  aided  by  the  State,  occupying  a 
sort  of  intermediary  position  between  the  State  and 
purely  voluntary  institutions.  It  enacts  special 
legislation  in  regard  to  them.  We  find  this  plan  in 
Switzerland,  Italy,  Belgium,  France  and  other  coun- 
tries of  the  Continent.  The  fourth  class  is  where 
the  State  does  not  interfere  at  all,  and  consists  of 
those  funds  voluntarily  created  by  employers  of 
labor  for  the  purpose  of  aiding  their  employees.  In 
some  of  the  European  countries  there  is  scarcely  a 
railway,  mining  or  other  large  industrial  company 
that  does  not  maintain  some  sort  of  a  fund  of  this 
description.  In  England  most,  if  not  all,  the  rail- 
way companies  have  such  institutions.  They  exist, 
too,  in  the  United  States.  The  Baltimore  and  Ohio 
Railroad  was  the  first  to  organize  an  Insurance  De- 
partment for  its  employees.  The  Pennsylvania 
Railroad  followed.     In  the  first  it  is  obligatory,  in 


272 

the  second  voluntary.  The  latter  company  would 
like  to  make  it  compulsory,  but  it  has  refrained  in 
deference  to  the  wishes  of  its  employees.  There  is 
a  feeling,  among  the  working  classes  of  America,  of 
independence — a  wish  to  spend  their  money  and 
meet  their  needs  according  to  the  dictates  of  their 
own  judgment.  These  several  schemes  have  been 
followed  by  the  plan  (voluntary  in  its  operation)  of 
the  Chicago,  Burlington  and  Quincy  Railroad — and 
along  the  same  lines  by  the  Philadelphia  and  Read- 
ing— the  Plant  system  of  Railway  and  Steamship 
lines — the  Lehigh  Yalley,  and  perhaps  others.  Over 
100,000  members  are  embraced  within  these  various 
plans — the  oldest  of  which  has  been  in  operation 
some  eighteen  years.  Again,  there  are  numberless 
schemes  providing  for  death,  sickness,  etc.,  etc., 
among  the  various  labor  organizations  throughout 
the  United  States,  all  showing  the  rapid  develop- 
ment and  the  vast  application  of  the  Insurance  idea, 
and  bearing  testimony  to  the  fact  that  its  great  field 
of  thought  and  operation  is  largely  directed  toward 
the  betterment  of  the  working  element,  or  the  in- 
dustrial classes,  of  the  country. 

A  GLANCE  AT  THE  CONDITIONS  CONNECTED  WITH 
THE  ESTABLISHMENT  OF  INDUSTRIAL  INSURANCE 
IN  THE  UNITED  STATES,    ETC. 

Approaching  our  conclusion :    it  must  not  be 


273 

assumed  that  the  planting  of  the  seeds  of  Indus- 
trial Insurance  in  the  United  States  has  been 
among  beds  of  roses.  It  has  been  confronted  by 
opposition — at  times  of  the  most  virulent  nature. 
It  has  literally  come  up  out  of  much  tribulation. 
Applying  for  authority  to  work  in  the  very  State 
whose  hospitality  this  Convention  is  to-day  enjoy- 
ing, we  were  answered  in  these  words:  ''Your 
business  is,  for  obvious  reasons,  wrong  and  against 
public  policy,  and  a  license  is  therefore  respect- 
fully denied."  A  certain  strabismic  Governor  of 
a  prominent  New  England  State,  in  a  speech  de- 
livered while  seeking  re-election,  said:  ''It will 
be  seen  on  page  8  of  the  Insurance  Report,  that 
the  Commissioner  recommends  fully  what  is  eu- 
phemistically   called     'Industrial    Insurance.'... 

This  is  not  legitimate  Life   Insurance  at  all 

Such  insurance  is  against  public  policy  and  ought 

not  to  receive  public  recognition  in  this  State 

It  should  be  discountenanced  by  every  one  in 
authority,  and  I,  consistent  with  my  duty  to  the 
State  and  with  my  conscience,  cannot  retain  in  office 
a  Commissioner  who  advocates  it."  And,  there- 
upon, for  this  offense  and  for  making  what  he 
termed  "favorable  mention"  of  six  companies 
(four  Ordinaries  and  two  Industrials),  "I  caused," 
he  said,  "the  Commissioner  of  Insurance  to  be 
turned  out."     Other  States  were  like-minded  as  to 


274 

the  admission  of  the  companies,  and  by  still  others 
a  frigid  welcome  was  extended. 

Parenthetically,  we  may  be  pardoned  for  asking 
how  it  could  be  expected  otherwise !  We  have 
had  about  225  Insurance  Commissioners  in  the 
United  States  since  Industrial  Insurance  was  in- 
augurated. Imagine  225  varieties  of  State  super- 
vision !  Does  not  this  bear  noble  tribute  to  the 
inherent  virtue  of  the  business  ? 

With  its  growth,  however,  this  opposition,  or 
unfriendliness,  has  gradually  disappeared,  and  for 
some  years  past  most  of  the  Commissioners  have 
maintained  a  friendly  and  helpful  attitude,  and 
some  by  official  utterance  and  by  personal  effort, 
have  rendered  invaluable  service  in  helping  to 
defeat  scandalous  attacks  upon  the  business. 
These  attacks  have  been  principally  made  by 
members  of  various  legislatures,  occasionally 
(though  very  rarely)  impelled  by  equal  parts  of 
good  faith  and  of  pathetic  ignorance,  but  generally 
inspired  by  some  statesman  self -organized  into  a 
Ways  and  Means  Committee  of  One.  The  atti- 
tude, also,  of  some  miscalled  '* charity  people" 
throughout  the  country  has  been  as  vindictive  in 
motive  as  it  has  been  ludicrous  in  result.  While 
some  of  the  most  sensible  utterances  on  behalf  of 
the  business  have  come  from  broad-minded  men 
and  women  whose  lives  are  devoted  to  the  proper 


275 

solution  of  the  complex  problems  of  poverty,  to 
which  they  bring  rare  skill  and  consummate  good 
judgment,  and  who  perceive  in  Industrial  Insur- 
ance its  power  and  potency  for  good,  there  have 
been  vicious  attacks  against  the  business  instigated 
by  old  ladies  of  both  sexes  impelled  by  love  for 
the  "dear  people,"  who  instinctively  froth  at  the 
mouth  at  the  simple  name  of  Industrial  Insurance, 
and  who  from  time  to  time  have  revelled-in  hyster- 
ical attacks  against  its  progress.  The  operations 
of  some  alleged  charity  organizations  would  be  lost 
in  obscurity — and  the  dear  public  might  forget  its 
duty  to  their  treasuries — if  they  failed  to  sally 
forth,  once  in  so  often,  to  emulate  Samso]^  in  smit- 
ing the  Philistines.  We  do  not  expect  these  in- 
cursions, either  from  the  statesmen  or  the  charity 
people,  to  ever  wholly  cease,  for  new  recruits  are 
coming  to  the  front  constantly,  who,  for  the  first 
time  in  their  innocent  lives,  learn  that  there  is 
such  a  business,  or  who,  scorning,  as  they  claim, 
the  clumsy  methods  of  predecessors,  propose  to 
show  that  really  "  up-to-date  tactics  "  are  all  that 
is  needed  to  wipe  the  business  out  of  existence. 

Still  another  source  of  attack  and  abuse  has  come 
from  certain  newspapers,  the  breed  of  which  will 
probably  never  die  out,  which,  perceiving  the  al- 
leged "monstrous  abuses"  of  the  system,  are  im- 
pelled by  a  high  sense  of  duty  to  the  public,  whose 


276 

servants  they  are,  to  expose  its  iniquities.  Some- 
times they  have  submitted  their  views  in  ' '  proof  " — 
so  careful  lest  any  possible  errors  be  committed  I 
Occasionally  their  columns  have  been  open  for  re- 
ply— at  a  dollar  a  line  and  a  one-half  page  "  Ad." 
for  a  year.  Then,  again,  now  and  then,  one  has 
tenderly  told  us  how  pained  he  has  been  at  the 
necessity  of  the  exposure — but  a  little  later  on  it 
has  apparently  been  more  painful  for  him  to  know 
how  to  stop.  These,  we  repeat,  have  been  a  part  of 
the  pains  and  penalties  of  prominence,  and  they 
will  doubtless  continue  till  the  millennial  dawn. 

It  is  along  the  lines  of  these  attacks  that  the  State 
Supervisors  can  render  incalculable  service  to  the 
public  and  to  the  companies,  if  they  are  so  disposed. 
Any  action  taken,  however,  favorable  or  unfavor- 
able, presupposes  thorough  knowledge  of  the  thing 
judged.  If  the  opportunities  of  a  Commissioner 
have  not  been  such  as  to  give  him  that  kind  of 
knowledge,  he  knows  how  and  where  to  acquire  it. 
The  thorougL  acquisition,  and  the  honest  employ- 
ment, of  that  knowledge,  then  become  a  matter 
between  him  and  his  conscience.  But  the  same 
judgment  which  would  constrain  him  to  take  no 
part  in  an  attack  instituted  from  without  against 
a  plan  or  a  company  with  which  he  lacked  sym- 
pathy, need  not  restrain  him  from  active  and  earnest 
defense  of  a  company,  or  a  plan,  which  he  regarded 


277 

as  wickedly  or  unjustly  assailed.  Industrial  Insur* 
ance,  as  we  have  before  said,  owes  a  debt^ — and  it 
makes  grateful  acknowledgment  of  it  here  and  now 
— to  the  honorable  gentlemen  at  the  heads  of  the 
State  Departments  (with  but  minor  exceptions),  who 
have  refused  to  see  it  assaulted  and  besmirched  by 
the  attacks  of  ignorant  or  vicious  men.  The  bus- 
iness has  nothing  to  conceal.  It  is  the  friend  of 
sunlight.  It  is  willing  and  wishful  that  from  school- 
house  and  press  (the  honest  press),  by  individuals 
and  by  organizations — on  the  forum  and  from  the 
pulpit — its  claims  should  be  discussed,  not  in  the 
interest  of  particular  companies,  or  their  agents, 
but  in  that  of  the  public  and  its  coming  generations. 
Reputable  companies  have  nothing  to  fear,  but 
everything  to  hope,  from  the  most  thorough  dis- 
cussion of  their  plans  and  purposes,  if  made  with 
frankness  and  intelligence.  And  upon  this  plat- 
form of  principle  and  purpose  the  Industrial  Com- 
panies will  continue  to  invoke,  as  they  trust  to  de- 
serve, the  considerate  judgment  of  the  insuring  pub- 
lic and  of  those  charged  by  the  state  with  their 
protection. 


MORAL  HAZARD  IN    LIFE    INSURANCE. 


JOSEPH  A.  DE  BOER  : 

MORAL  hazard  in  life  insurance  is  that  some- 
thing which  adversely  affects  its  business 
results.  It  arises  from  unknown  or  problematical 
sources.  Their  contingent  influence  is  always  non- 
calculable,  even  when  its  effect  are  clearly  recog- 
nized and  observed.  The  conditions  which  foster 
moral  hazard  are  ignorance,  self-interest  and  moral 
cowardice  among  those  by  whom  and  for  whom  the 
business  is  being  done.  It  may  have  an  honest  or 
a  vicious  origin  and  may  originate  by  strong  com- 
bination of  all  these  forces  at  one  time  or  through 
a  species  of  their  loose  alliance  at  different  times  ; 
but  the  elements  of  this  form  of  life  insurance  haz- 
ard usually  co-operate. 

It  is  also  ubiquitous  and  its  potential  force  may 
be  said  to  be  commensurate  with  the  average  mor- 
ality and  intelligence  of  all  the  people  who  con- 
trol the  operations  of  a  life  insurance  office, 
directly  or  remotely.     What  form  it  shall  take, 


279 

or  what  influence  it  shall  exert,  depends,  to  some 
extent,  upon  customs  and  applied  management. 
The  customary  determines  the  moral  tone. 

It  is  also  peculiar  of  moral  hazard  that  its  blows 
almost  invariably  fall  unexpectedly,  but  scarcely 
ever  that  some  manager  could  not  say:  *'Ihad 
some  sense  perception  of  its  approach."  When 
this  occurs,  either  courage  was  wanting  to  combat 
the  admission  of  this  hazard,  or,  else,  local  condi- 
tions of  some  kind  suppressed  the  judgment  of  an 
intelligent  minority.  For  a  great  company  is  a 
little  cosmos,  or,  better  yet,  a  government,  usually 
oligarchical  in  form,  sometimes  monarchical,  but 
always  a  nominal  democracy.  It  is  a  democracy 
in  spirit,  an  oligarchy  in  practice  and  a  monarchy, 
in  some  few  cases,  by  proxy.  It  deals  with  affairs 
of  national  magnitude,  and  with  problems  of  such 
vast  and  varied  complication  that  its  work  will 
very  likely  be  best  performed  by  a  representative 
oligarchy  of  intelligent  and  interested  directors 
and  with  the  least  possible  interference  by  outside 
supervision.  Distributed  responsibility  among 
trained  and  experienced  specialists  will  undoubt- 
edly attain  the  best  results,  provided  the  special- 
ists themselves  co-operate.  For  life  insurance  has 
its  essential  departments  of  work,  the  actuarial, 
the  medical,  the  financial,  the  management  of 
business  matters  and  the  field.  '^  These  must  con- 


280 

tribute  to  the  general  purpose,  the  creation,  care 
and  settlement  of  life  insurance  trusts.  Anything 
which  affects  the  influence  of  the  responsible 
officer  in  charge  of  any  one  of  these  great  de- 
partments of  work,  or  disturbs  their  mutual  co- 
operation, is  moral  hazard. 

The  mortality  and  interest  assumptions  are  well 
understood.  Their  applicability  to  the  calculation 
of  varying  benefits  is  also  appreciated,  by  which 
mean  their  limitations  for  commercial  purposes. 
This  limitation  is  expressed  by  the  usual  contracts 
of  Life,  Endowment  and  Term  Policies.  Not 
much  is  gained  by  deviation  from  the  simpler 
forms. 

It  may  also  be  said  that  the  substance  of  life  in- 
surance falls  within  this  definition.  The  modifica- 
tions under  the  title  of  non-forfeiture,  indisputa- 
bility, installment  benefits  and  conversions  being 
logical  extensions  of  the  major  guarantees.  The 
ultimate  experiences  under  these  multiplied  op- 
tions is  as  yet  not  clearly  understood.  Their 
liberal  character  bears,  I  think,  upon  the  institu- 
tion's potentiality  as  a  surplus  maker,  and  will 
necessitate  hereafter  restricted  dividend  returns 
and  a  constant,  conservative  valuation  of  all 
assets. 

It  does  not  appear,  looking  back  half  a  century, 
that  there  is  any  moral  hazard  in  the  mathematics 


281 

of  the  business.  The  calculation  of  net  rates  for 
contingencies  based  upon  single  lives  is  understood. 
Nor  yet  in  the  adjustment  of  loadings  for  the  pur- 
pose of  management  expenses  and  extraordinary 
accidents  of  experience  ;  but  there  is  an  undefined 
danger  in  continuing  a  practice  which  impairs  the 
net  premiums  on  new  business  so  seriously  as  is 
now  the  case.  In  my  judgment,  new  business 
ought  to  be  secured  under  circuir.  stances  that  will 
admit  of  treating  it  upon  a  net  valuation  basis 
more  nearly  in  accord  with  the  mathematical 
facts.  If  the  next  decade  shall  witness  a  deficit  in 
reserves  at  the  end  of  the  first  policy  year,  it  is  an 
error  and  an  undoubted  source  of  hazard  to  con- 
tinue putting  up  the  necessary  reserves.  This  is 
the  great  problem  which  now  demands  solution  by 
common  consent,  but  competition,  often  most  dan- 
gerous to  those  institutions  which  are  founded 
upon  other  than  mere  social  and  industrial  con- 
siderations, will  probably  continue  to  retard  the 
solution  of  such  impairments. 

Nor  does  there  exist  a  serious  doubt  as  to  the 
general  merit  of  the  mortality  assumptions  on 
which  our  offices  have  been  doing  work.  The  in- 
terest assumption,  however,  is  a  greater  source  of 
debate  because  it  involves,  from  its  own  nature,  a 
greater  range  of  details.  The  present  tendency  is 
to  accept  three  per  cent. ,  and  this  is  a  very  whole- 


282 

some  and  conservative  tendency.  For,  accepting 
these  assumptions,  there  is  not  the  slighest  ground 
for  holding  that  our  companies  will  not  make  the 
most  ample  provisions  for  meeting  every  pledge 
and  guarantee,  made  upon  the  level  premium 
plan. 

The  assumption  of  chief  consequence  to  level 
premium  insurance  is  interest  and  margin  ;  to  as- 
sessment and  natural  premium  insurance,  mortal- 
ity and  margin.  To  offset  moral  hazard  from  an 
impairment  of  these  assumptions,  the  former  must 
have  regard  to  its  investments,  both  from  the 
standpoint  of  their  quality  and  their  necessary 
earning  capacity,  and  supplement  all  this  by  hold- 
ing to  an  actual  general  surplus  addition  of  at 
least  from  eight  to  ten  per  cent.  Assessmentism, 
etc.,  must  keep  within  its  provision  for  expenses 
and  at  the  same  time  maintain  a  special  fund  to 
meet  all  accidental  extra  mortality.  But,  then,  is 
it  not  now  reasonable  to  doubt  the  permanency  of 
all  schemes  of  life  insurance  which  postulate  a 
system  of  increasing  risk  on  increasing  premiums 
or  assessments  ?  It  hardly  matters,  as  we  look 
toward  the  middle  of  the  twentieth  century, 
whether  assessmentism  w^as  imperfect  generaliza- 
tion or  not ;  whether  capacity  or  fraud  dominated 
a  part  of  its  origin  and  operations  ;  whether  ignor- 
ance or  a  true  desire  to  cheapen  the  benefits  of  life 


283 

insurance,  or  mendacious  speculation  fathered 
their  disastrous  results.  The  facts  are  that,  how- 
ever reasonable  this  pseudo -insurance  may  appear 
in  theory,  its  application,  as  industrial  society  is 
organized,  is  wanting  in  hope.  The  old  line  insur- 
ance has  encountered  its  competition  with  absolute 
success  and  with  increase  of  public  confidence  in 
itself  from  the  demonstration,  which,  pitiful 
enough,  has  proceeded  upon  a  most  gigantic  scale. 
Politics  has  met  it  in  the  lobby,  supervision  has 
dealt  with  it  in  reports  and  courts  of  insolvency 
have  passed  upon  it  in  practice.  But,  gentle- 
men, nowhere  has  this  pseudo-insurance  left 
traces  of  more  permanent  regret  than  in  the 
desolate  homes  of  the  fatherless  and  the  orphans. 
No  matter  how  the  experiment  has  been  varied, 
the  registered  result  is  the  same.  Insurance  is 
not  cheap  when  it  fails,  nor  economical  when  it 
makes  no  return.  It  is  not  sentiment  to  say  that 
men  who  practice  life  insurance  in  any  capacity, 
with  any  regard  whatever  for  their  fellow-men, 
ought  to  be  governed  by  the  greatest  precept  of 
their  business,  that  their  first  duty  is  to  make  in- 
surance absolutely  sure.  Assessmentism  has  often 
proved  itself  a  moral  hazard  to  the  people.  In- 
dustrial Insurance,  that  lusty  child  of  ceaseless 
vigilance  and  unprecedented  activity,  proves  its 
right  to  exist  by  its  power  to  perform,  but  teaches 


284 

the  necessary  lesson  that  life  insurance  brought 
within  the  reach  of  the  poorer  classes  cannot  be 
effectively  done  except  at  the  greater  cost  attend- 
ant upon  every  form  of  retail  transactions.  As- 
sessmentism,  done  by  wholesale  and  at  a  discount, 
upon  a  scheme  at  variance  with  the  social  and  in- 
dustrial conditions  of  the  people  to  whom  it  is  ad- 
dressed, suggests  that  its  operations  can  only  be 
insured,  as  a  system,  under  control  by  the  state. 
Its  unrestricted  and  unlimited  operation  in  the 
hands  of  a  few  men  is  morally  wrong. 

I  do  not  mean  to  aifirm  that  the  level  premium 
system  has  no  room  for  improvement,  but  think, 
rather,  that,  with  time,  there  will  eventuate  an 
even  more  equitable,  economical  application  of  its 
benefits  to  the  needs  of  American  Society  than  al- 
ready exists  ;  and  our  present  policy  system  is 
certainly  without  comparison  in  the  world.  But 
against  the  moral  hazard  of  assessmentism  our 
legislators  are  in  duty  bound  to  protect  the  people. 

It  may  be  in  order  to  insert  here  a  transcript  of 
assessment  history  from  the  Massachusetts  Life 
Insurance  Report  for  1898,  page  XYII  :  "  Follow- 
ing the  passage  of  the  general  assessment  law  of 
1877,"  80  runs  the  story,  "  sixty-two  assessment 
companies,  as  has  already  been  said,  were  almost 
immediately  organized.  Every  one  of  them  has  now 
departed,  some  going  in  infancy,  some  in  child- 


286  • 

hood,  while  only  two  lived  to  be  of  much  conse- 
quence, and  both  of  these  are  now  having  their 
bankrupt  estates  administered  upon  by  order  of 
the  Court." 

There  is  no  more  sorrowful  narrative  now  in 
print  than  the  statistical  record  of  the  many  forms 
of  impossible  insurance  organizations  of  one  kind 
and  another,  which  were  tabulated  by  the  compe- 
tent Jenney  in  the  United  States  Census  of  1890. 
It  would  not  have  been  very  much  out  of  place  to 
have  starred  the  following  foot-note,  double 
headed,  under  these  reports  : 

The  State  is  responsible  for  every  form  of  long 
continued  commercial  impossibility,  whenever  the 
state  creates  and  ostensibly  supervises  it.  It  is 
therefore  debatable  whether  these  statistics  do  not 
more  properly  belong  to  a  chapter  on  Practical 
American  Politics  than  iimerican  Life  Insurance, 
but  they  are  given  here  because  by  title,  at  least, 
this  is  their  nominal  place. 

The  next  factor  in  a  system  of  life  insurance, 
approved  by  experience  and  projected  on  moral 
assumptions,  is  the  selection  of  risks,  which  is  by 
no  means  the  exclusive  function  of  the  medical 
examiner.  For  the  custom  now  is  to  identify  com- 
pensation with  business  getting,  prompt  payment 
with  acceptance  of  proofs,  and  to  divert  hazards 
out  of  the  ordinary  into  collateral   but  different 


286 

channels  of  risks,  by  a  material  and  most  liberal 
modification  of  the  policy,  as  compared  with  what 
it  was  a  decade  or  two  ago.  The  difference  of  a 
drop  determines  whether  the  solution  shall  present 
an  alkaline  or  acid  reaction.  So,  also,  the  selection 
of  risks,  or,  rather,  the  eventual  composition  of  the 
company's  risks,  will  be  affected  by  some  material 
practice  or  condition  of  management  with  the 
origin  or  application  of  which  the  examiner  him- 
self has  no  concern.  The  field,  as  we  call  the 
Agents,  demands  in  its  own  right  and  of  necessity, 
certain  practical  conditions  of  work :  A  range  of 
entry  ages  from  at  least  twenty  to  sixty,  sometimes 
from  fifteen  to  seventy  ;  a  maximum  policy  denom- 
ination in  excess  of  the  average  policy  amount, 
and  ranging  from  $10,000  to  $100,000  ;  more  re- 
cently the  extension  of  its  market  to  woman,  who, 
satisfactory  to  say,  now  stands  with  man  on  a 
substantial  equality  as  a  life  insurance  risk.  Its 
non -forfeiture,  incontestability,  availability,  con- 
vertibility policy  control  by  the  insured  and 
surplus  options  for  every  form  of  annuity  income 
or  insurance  reversions.  Thus,  all  ages,  both  sexes, 
every  amount,  and  the  broadest  range  of  policy 
options  are  already  involved  in  this  play  of  con- 
stantly shifting  contingent  values.  The  fact  that 
the  evolution  of  the  life  policy  has  been  one-sided 
and    toward    the    policy-holder    cannot    be  over- 


287 

emphasized.  It  is  a  reason  enougli  for  holding 
that  selection  at  entry  should  be  purged  as  much 
as  possible  from  moral  hazard  in  order  to  give  the 
companies  which  guarantee  so  much  the  quality 
of  insurance  which,  for  that  reason,  they  so  much 
require. 

The  expression  "moral  hazard"  may  now  re- 
quire a  further  definition.  While  it  is  not  often 
found  in  the  literature  of  the  business,  it  occurs 
quite  often  in  private  correspondence  with  the  field. 
In  such  event,  it  more  often  represents  an  experi- 
enced judgment  than  a  demonstration,  but  it  exists 
there,  and  its  existence  is  recognized  as  a  factor  in 
selection  by  the  many  rejections  recorded  for  this 
cause.  The  learned  authors  of  "  Stratagems  and 
Conspiracies  to  Defraud  Life  Insurance  Companies" 
say  of  the  cases  edited  in  that  suggestive  work  : 
''  Collectively  they  emphasized  as  never  before  the 
increasing  importance  of  scrutinizing  the  moral 
hazard  as  closely  as  the  physical  risk,  and  the  need 
of  more  watchful  attention  to  the  question  of 
insurable  interest  and  its  bearing  upon  assign- 
ments." Well,  with  what  does  the  collection 
deal?  With  pretended  death,  speculative  insur- 
ance, homicides,  poisonings,  suicides,  and  with 
certain  problematical  and  nondescript  cases ;  in 
short,  with  criminal  selection.  This  form  of  hazard 
must  naturally  be  encouraged  through  liberalizing 


288 

policy  conditions  ;  and  it  is,  therefore,  particularly- 
interesting  that  the  work  from  which  this  quotation 
is  made  also  hints  at  criminal  negligence  on  the 
part  of  managers  themselves.  For  with  propriety- 
is  it  intimated  that  ambitions  for  great  lives  on  the 
part  of  the  companies  and  a  great  remuneration  on 
the  part  of  the  agents,  may  have  induced,  to  quote 
more  directly,  ''The  placing  aggressive  weapons 
in  the  hands  of  intending  assailants.''  I  infer 
from  this  wording,  which  contains  some  truth,  and 
from  observation  also,  that  there  may  be  an  undue 
and  immoral  haste  in  accepting  proposers,  a  lack 
of  local  inspection  of  the  unprejudiced  variety, 
and  a  disreputable  competition.  Perhaps,  gentle- 
men, it  is  wrong  to  apply  the  adjective,  ''dis- 
reputable" to  modern  life  insurance  competition, 
but  I  had  in  mind  the  saying  used  some  six 
years  ago  before  this  convention  by  Mr.  D.  P. 
Fackler,  who  reported  an  officer  as  having  said  that 
"Life  insurance  was  the  only  business  in  which 
competition  had  not  benefited  the  public."  This  is 
true  in  the  sense  that  it  has  not  reduced  costs ; 
for  attempted  reduction  of  rates  was  murder  of  the 
insurance.  It  has  not  improved  solicitation,  but 
developed,  to  the  contrary,  twisting,  rebating,  and 
pernicious  literature.  It  has  not  improved  super- 
vision, but  tended,  rather,  to  make  that  more  bur- 
densome.    Neither  has  it  reduced  the  expenses  of 


289 

management,  of  which  increase  a  part  is  abnormal 
and  another  part  is  legitimate,  because  due  to  a 
higher  order  of  field  work  and  the  general  change 
in  the  living  conditions  of  the  race.     Competition, 
however,  has  contributed  to  a  broader  development 
of  guaranteed  protection  as  represented  by  non-for- 
feiture ;  but,  as  Mr.  Fackler  pointed  out,  dividends 
have  been  curtailed  to  apply  on  expense  account. 
And  this  has  in  it  greater  moral  hazard  that  man- 
agement expenses  should  consume  the  entire  mar- 
gin and  a  considerable  portion  of  the  net  premium 
as  well.     There  is  self-evident  moral  hazard  in  this 
condition  of  affairs,  which  leads  us  up  to  its  most 
potent  offset,  vitality  gains.    There  is  moral  hazard 
in  selection,  due  to  the  system  of  insurance  itself, 
over  which  assessmentism  has  little  or  no  control, 
but  which,  in  level  premium  insurance,  is  automat- 
ically regulated  in  a  varying   degree,    especially 
when  official  and  professional  skill  in  selection  pro- 
jects it  rightly  in  the  first  place.     One  common 
check  upon  adverse  selection  exists  already  in  the 
interchange  of  declinations.     I  have  never  learned 
from  those  who  were  able  to  observe  its  workings 
fully  that  this  service  has  not  proved  an  efficient, 
proper  and  economical  device.    The  moral  interests 
of  life  insurance  demand  that  it  be  retained  and 
perfected,  and  that  it  be  employed  in  confidence 
and  with  honor. 


290 

You  will  not  fail  to  notice,  gentlemen,  as  you 
read  the  criminal  life  cases  to  which  your  attention 
has  been  directed,  as,  indeed,  the  editors  point  out, 
that  the  Bench,  with  scarce  exception,  have  usu- 
ally tried  them  with  nice  discrimination  and  most 
intelligent  attention,  whereas  injustice  was  dealt 
out,  if  at  all,  by  a  prejudiced  or  unintelligent  jury. 
It  is  also  intimated  that  not  the  least  unfortunate 
results  of  such  impaired  verdicts  consists  in  the  en- 
couragement which  they  extend  to  fresh  attacks  of 
criminal  selection.  It  would  be  equally  absurd  to 
advocate  the  abolishment  of  the  jury  or  the  refusal 
by  companies  to  litigate  fraudulent  claims  upon 
the  ground  that  justice  cannot  be  had.  For  trial 
by  jury  is  a  sound  and  permanent  factor  in  self- 
government,  and  litigation  becomes  a  duty  when  a 
claim  is  unjust.  It  may  be  more  practicable  and 
cheaper  to  settle  such  cases  out  of  court,  and  to 
take  credit  in  display  advertisements  for  being 
non-litigious ;  but,  that  is  really  quite  as  immoral 
as  not  to  pay  a  just  claim  on  a  contract  which  was 
fairly  made.  It  may  not  always  be  possible  for  a 
company  to  obtain  justice  from  a  jury  or  the  leg- 
islature ;  but  that  is  also  true  of  the  individual  in 
his  dealings  with  corporations.  They  must  acquire 
a  better  understanding  with  each  other,  since  injus- 
tice is  ahvays  a  grave  mistake,  and,  in  the  long 
run,  dangerous  to  them  both.    But,  since  we  must 


291 

have  a  jury  and  will  have  cases  to  try,  why  not 
make  the  public  more  intelligent  as  to  the  upright 
and  honest  character  of  our  regular  life  insurance 
companies,  and  instead  of  spending  so  much 
money  for  advertising  unintelligent  balance 
sheets,  ratios,  competitive  exhibits  and  citation  of 
names,  put  up  campaigns  of  useful  information? 
The  facts  are  good  enough  to  disseminate,  if  attended 
by  an  appropriate  moderation  in  conduct  on  the 
part  of  those  who  represent  the  business  in  any 
capacity.  When  the  people  have  the  idea  that  the 
leading  companies  are  fair,  and  not  secretive ; 
when  business  is  sold  truthfully  and  taken  care  of 
economically  ;  when  insurance  is  supervised  intel- 
ligently, and  just  claims  are  always  promptly 
paid,  the  companies  may  get  a  hearing  and  their 
cases  may  be  read  not  with  the  prejudices  of  nat- 
urally adverse  jurymen,  but  in  the  light  of  truth. 
There  is  one  note  of  conseq  uence,  however,  in  this 
connection,  namely,  that  the  classes  from  which 
our  juries  are  usually  drawn  have  the  general 
impression  that  our  life  offices,  like  other  corpora- 
tions, belong  to  the  Directors,  or  the  officers,  or 
even  to  a  single  man.  They  do  not  imagine  that 
in  fact  and  in  substance  they  are  the  property  of 
thousands  of  widely  distributed  fellow-citizens,  and 
even,  as  in  one  case,  to  some  two  millions  of  our 
own  people,  bread-winners  all. 


All  this  is,  of  course,  a  bit  empirical,  old-fash- 
ioned and  commonplace,  but  as  Mercutio  said  of 
his  wound,  '"twill  serve."  While,  therefore,  no 
pretence  is  made  to  giving  a  money  value  to  this 
important  phase  of  moral  hazard,  I  yet  believe  in 
the  wisdom  of  its  recognition,  and  that  publicity 
is  the  best  antidote  against  all  forms  of  corporate 
insolvency,  unregulated  power  and  centralized 
influence.  So,  in  the  long  run,  the  right  practice 
for  life  insurance  is  to  anticipate  litigation  by 
clearly  drawing  their  contracts,  by  guarding 
against  criminal  selection,  and  then,  whenever  an 
unrighteous,  fraudulent  claim  or  immoral  demand 
does  arise,  to  fight  it,  whenever  there  is  a  fighting 
chance.  The  fear  of  being  regarded  litigious  should 
be  held  in  dishonor  precisely  as  the  citation  of 
trivial  or  technical  matter  should  be  eschewed. 
There  should  be  an  honest  issue  against  the  dis- 
honest and  that  issue  should  be  pressed  on  its 
merits  without  fear  or  favor. 

There  exists  a  yet  greater  moral  hazard  in  life 
insurance  selection,  due  to  the  insufficiency  of 
data,  or  to  concealment  or  misrepresentation  of 
data,  upon  which  a  selecting  officer  is  asked  to 
pass.  It  is  a  curious  fact  that  while  medical  selec- 
tion is  of  great  value  to  the  business,  its  right  to 
exist  has  been  questioned.  It  is  an  essential.  But 
when  a  declination  is  recorded,  the  solicitor  loses 


293 

a  client,  the  proposer  loses  his  policy,  the  General 
Agent  is  involved  in  explanations  with  his  sub- 
agent,  and  every  man  of  them  is  not  unlikely  to  be- 
lieve that  the  Company  has  lost  an  opportunity, 
But  selection  is  as  necessary  to  maintain  the  mor- 
tality assumption  as  investment  to  maintain  the 
interest  assumption,  and  no  fault  should  be  found 
if  proper  rules  to  obtain  good  security  are  enforced. 
Both  require  expert,  professional  knowledge,  and 
both  require  an  exercise  of  judgment,  on  separate 
considerations,  which  judgment,  in  the  case  of 
medical  selection,  especially,  is  often  more  easily 
expressed  as  a  dictum  than  explained  in  detail. 

The  medical  blank  may  usually  be  analyzed  into 
five  factors  :  (1)  The  description  ;  (2)  the  statement 
of  personal  habits  ;  (3)  personal  history ;  (4)  fam- 
ily history  ;  (5)  physical  examination.  The  family 
history  is  rarely  irrelevant,  sometimes  extremqjy 
material,  and  always  helpful  ;  but  the  answers 
relating  to  the  applicant  are  of  chief  conse- 
quence. Each  of  these  divisions  include  a  large 
number  of  questions,  the  total,  even  in  the  sim- 
plified blanks,  reaching  into  the  hundreds.  These 
are  material  in  varying  degrees,  by  comparison 
with  each  other,  or  in  combination.  The  medical 
report  constitutes  a  composite  photograph  of  the 
risk.  The  negatives  are  good,  bad  and  indifferent. 
You  ask,   ''Why  mention  this?"     Because  it  is 


294 

common  to  forget  it.  The  proposer  may  be  an  ac- 
tor in  character  role,  or  may  be  taken  in  a  bad 
light,  or  by  an  incompetent.  For  other  reasons 
the  picture  may  flatter  him,  as  the  negative  has 
been  judiciously  touched.  The  elements  of  dis- 
tance, of  rural  and  city  examiner,  of  field  super- 
vision, of  local  agency  work  and  of  Home  Office 
discipline,  have  their  respective  effects.  At  every 
point  in  the  process  of  selection  there  is  possibility 
of  subversion,  suppression,  inaccuracy  and  even 
fraud.  It  is  thought,  for  these  reasons,  that  moral 
hazard  exists,  and  that  this  unknown  error,  not- 
withstanding the  law  of  compensation,  makes  for 
increased  loss.  Anxiety  to  clear  the  desk,  im- 
pending friction  with  influential  agents,  pressure 
from  ambitious  managers,  the  incidents  of  social, 
financial  or  political  influence,  an  honest  wish  to 
eAcourage  the  field,  the  temptation  to  assist  enthu- 
siastic competition,  all  play  their  several  parts  in 
selection,  the  degree  of  their  influence  in  forming 
judgments  depending  upon  the  general  make-up  of 
the  office  and  its  men.  I  do  not  know  if  this  kind 
of  moral  hazard  is  more  or  less  than  in  former 
years,  when  volume  of  business  is  considered,  but 
think  it  is  less. 

Mr.  Emery  McClintock,  in  his  essay  relating  to 
the  ''Effects  of  Selection,"  has  recognized  the 
agencies  of  (a)  unconscious  dishonesty ;  {b)  office 


295 

and  agency  efforts  to  secure  new  business  ;  and  (c) 
the  office  action  in  rejecting  undesirable  risks  ;  to 
which  add,  (d)  conscious  dishonesty  and  fraud.  It 
is  the  selection,  at  entrance,  which  is  of  chief  con- 
cern ;  but  exit  selection  should  also  engage  more 
fully  the  attention  of  managers  than  has  hereto- 
fore been  the  case.  The  following  exit  agencies 
have  been  noted  ;  (a)  changes  in  the  circumstances, 
motives  or  opinions  of  the  insured ;  (b)  facilities 
for  withdrawal  introduced  by  non-forfeiture ;  (c) 
office  efforts  to  induce  unsound  lives  to  withdraw  ; 
(d)  competitive  efforts  to  influence  surrenders  or 
twisting  ;  {e)  temporary  necrosis  of  the  company. 
Entrance  selection  is  affected  by  the  company's 
reputation,  the  form  of  its  contracts,  the  average 
ability,  experience  and  character  of  its  agents,  and 
the  ability,  judgment,  experience  and  character  of 
its  official  staff.  The  best  protection  against  the 
ill-effects  of  exit  selection  is  the  maintenance  of  a 
permanent  membership  confidence  through  econ- 
omical management  and  conservative  investment. 
This,  however,  is  the  product  rather  of  long 
endorsed  general  conduct  than  of  specific  acts.  At 
entrance,  on  the  other  hand,  specific  acts  of  judg- 
ment will  permanently  influence  the  quality  of  the 
company's  composition.  Selection  is,  therefore, 
not  to  be  over-estimated  or  limited  in  influence, 
but,  rather,  to  be  viewed  as  one  of  the  great  life 


296 

insurance  functions,  ranging  by  the  side  of  calcu- 
lation, investment  and  management. 

If  that  wonderful  Profit  and  Loss  Account  for 
1895,  1896  and  1897  signifies  anything,  it  signifies 
this  :  Surplus  interest  declines  because  of  general 
economic  conditions  ;  surplus  margins  contract  be- 
cause of  expanding  management  expenses ;  for- 
feiture profits  decrease  because  of  non-forfeiture 
endorsements,  and  enfranchised  policy  conditions. 
The  one  surplus  factor,  mirabile  dictu^  which 
often  best  retains  its  vitality,  is  mortality. 

The  general  summaries  emphasize  the  wisdom  of 
giving  to  selection  its  appropriate  place.  I  make 
suggestions  upon  this  subject  notwithstanding, 
with  extreme  difiidence,  because  of  the  many  and 
varied  difficulties  involved  :  (1)  The  time  period  of 
indisputability  in  contracts  should  be  co-terminus 
with  the  close  of  that  policy  year  in  which  non- 
forfeiture begins.  Material  error,  discovered 
within  that  period,  including  special  reservations 
for  cancelation,  should  be  enforced.  (2)  The  De- 
partment of  Selection  should  be  left  unhampered 
in  its  work,but  should  include  arrangements  for  an 
average  judgment ;  for  business  or  mathematical 
experience  is  frequently  required.  (3)  Doubtful 
risks  should  be  reviewed  by  a  committee,  composed 
of  those  men  at  the  Home  Office  who  have  the  best 
qualifications  for  that  work.  Doubtful  cases  should 


297 

be  discussed  in  committee  and  be  disposed  of  by  a 
majority  vote.  (4)  The  appointment  of  medical 
examiners  and  their  service  should  be  divorced 
from  the  field.  They  should  be  educated  by  tenure 
of  office  to  co-operate  with  the  office  in  a  purely 
professional  way,  always  having  regard  to  its  ap- 
proved lines  and  special  features.  Within  proper 
bounds,  the  examiner  should  give  the  local  agent 
every  assistance  in  his  work — the  good  word,  the 
timely  suggestion,  and  prompt  service.  But  the 
company  must  have  a  professional,  independent, 
intelligent  review  of  the  risk  by  the  man  on  the 
ground.  That  is  worth  what  is  now  paid  for  it — if 
you  get  it.  If  you  do  not,  the  money  disbursed  for 
local  selection  is  wasted. 

The  objection  will  be  made  to  this  scheme  that  it 
is  impracticable,  that  it  invites  friction,  the  sus- 
pending of  new  issues  and  a  general  waste  of  time. 
It  is  necessary  notwithstanding  and  when  once 
thoroughly  inaugurated  will  be  sustained.  The 
public  itself  has  an  interest  in  careful  selection. 
Every  company  presents  its  own  files  of  adverse 
selection,  its  bankrupt  suicides,  and  its  mendacious 
Simons,  dead.  Why  hurry — when  occupation  is 
not  defined  ?  When  extra-fat  men  have  not  been 
weighed  ?  When  men  of  advanced  years  display  a 
record  of  albuminuria  ?  When  past  and  present 
habits  are  involved  ?    When  a  personal   illness, 


298 

which  may  have  been  serious,  is  popularly  de- 
scribed ?  When  aged  proposers  present  a  negative 
family  history  ?  It  is  immoral  and  invites  disaster 
to  pledge  trust  funds  upon  a  risk  not  fairly  de- 
scribed. '' Femina  mutahUe  et  riarlum'^^  and  is 
much  more  difficult  to  select.  It  does  not  matter 
much  if  this  be  due  to  her  larger  power  of  conceal- 
ment, to  her  more  limited  business  instincts,  to  her 
greater  want  of  average  insurable  interest,  or  of  her 
being  more  difficult  to  place  by  life  insurance  ex- 
aminers— the  fact  is  that  woman,  from  a  business 
standpoint,  is  more  impossible.  Especial  care,  in 
her  case,  should  therefore  be  exercised  and  no 
amount  of  what  is  vulgarly  termed  ''kicking" 
should  prevail  against  the  reasonableness  of  this 
general  proposition.  As  a  safeguard  against  moral 
hazard  in  entrance  selection,  it  is  important  that 
every  phase  of  this  work  and  every  material  fact 
should  be  diligently,  persistently  and  impartially 
sought  out  and  applied.  An  interesting  species  of 
moral  hazard,  which  must  be  referred  to  under  this 
title,  is  that  which  results  from  local  influence  par- 
ticularly in  small  communities,  where  man  knows 
man  and  where  there  exists  of  necessity  a  very 
close  business,  social,  political  and  family  relation- 
ship. This  condition  promotes  identity  of  interest 
and  this,  in  turn,  originates  a  kind  of  impaired 
judgment,  when  opinions  are  to  be  expressed.  For 


299 

at  this  stage  in  the  evolution  of  man' s  moral  per- 
ception, it  cannot  always  be  expected  that  the  usual 
fee  will  buy  an  honest  opinion,  if  a  rejection  based 
uj^on  that  opinion,  may  lose  to  its  giver  either  local 
influence  or  a  larger  pecuniary  interest.  This,  more 
than  inferior  capacity  for  making  physical  exam- 
inations, is  to  be  dealt  with  as  a  factor  in  rural  as 
distinguished  from  urban  selection  of  risks.  I  do 
not  wish  to  be  regarded  as  charging  dishonesty  to 
country  examiners  as  a  class.  I  merely  recognize 
their  human  nature  and  the  effect  upon  human 
judgment  of  their  surroundings  and  will  add  that, 
as  a  class,  I  consider  them  most  excellent  and  able 
men.  The  integrity  of  opinions  in  all  depart- 
ments of  life  work  is  usually  commensurate  with 
the  ability  of  their  givers,  precisely  as  lack  of 
capacity  breeds  hypocrisy  and  lies.  Every  small 
community  contains  men  whose  professional  repu- 
tation is  measured  by  character  and  honest  worth  ; 
but  that  sparsely  settled  fields,  far  distant  from 
our  offices,  constantly  present  the  other  extreme  is 
also  certain.  There,  as  elsewhere,  snap  shots  are 
taken  for  "auld  acquaintance  sake."  Against  the 
ultimate  bad  effects  which  this  form  of  moral 
hazard  may  exercise,  use  may  be  had  of  special 
instruction,  but,  better  still,  of  most  careful  ap- 
pointments in  the  first  place,  supplemented  by 
frequent  personal  inspection  both  of  these  officers 


300 

and  of  the  risks  which  they  advise.  Neither  is 
omniscience  ascribed  to  life  insurance  officials  who 
doubtless  have  an  ample  breathing  space  in  their 
respective  spheres  and  make,  no  doubt,  occasional 
mistakes.  But  if  their  average  judgment  is  sound, 
retain  them  and  support  their  action.  Do  not 
weaken  or  dissipate  their  energies.  If  not  sound, 
find  other  men — but,  let  mutual  life  insurance  of 
selected  lives,  at  the  outset  of  selection,  be  fair  to 
itself.  If  the  much-vaunted  idea  of  science  is  to 
be  retained  in  the  business — pursue  it  faithfully 
and  honor  it,  entrusting  to  the  proper  officials 
responsibility  for  insurance  work,  with  power 
sufficient  to  maintain  that  work  on  moral  lines. 
For,  as  Emerson  set  down  in  his  ^'Natural  His- 
tory of  the  Intellect,"  "Knowledge  is  plainly  to 
be  preferred  before  power,  as  being  that  which 
guides  and  directs  its  blind  force  and  impetus." 

The  third  important  species  of  moral  hazard, 
considering,  assumptions  and  selection  the  first 
two,  is  of  investment.  Cornelius  Walford  quoted 
over  forty  years  ago,  more  aptly  than  he  could 
perhaps  do  to-day,  a  Mr.  Pocock  to  the  following 
effect:  "The  parties,  having  the  management  of 
the  office,  should  be  well  known  to  the  mercantile 
world  as  men  of  substance,  integrity,  and  intelli- 
gence, rather  than  persons  with  imposing  titles, 
such  as,  in  fact,  are  daily  announced  as  managers 


301 

and  directors  of  many  of  the  speculations  at  the 
present  time ;  for  it  should  always  be  borne  in 
mind  that  the  great  object  to  be  attained  is 
prudent  management  and  a  careful  investment  of 
the  funds  of  the  society."  It  is  not  unwise  to  re- 
call the  suggestion  since  upon  the  results  of  in- 
vestment depend  not  only  the  success  of  the 
assumptions  and  of  the  whole  scheme  of  life  in- 
surance, but,  in  a  large  degree,  the  profits,  divi- 
dends or  surplus,  however  called.  The  power 
which  handles  the  funds  is  the  great  power  and  its 
management  is  almost  always  combined  with  an 
acquisition  of  more  funds  through  old  and  new 
business  accounts.  Large  life  insurance  funds 
cannot  be  handled  over  a  long  period  of  time  with- 
out the  experience  of  some  loss.  The  problem 
grows,  like  the  grasshopper,  more  of  a  burden  as 
the  funds  increase.  And  so  this  matter  of  life  in- 
surance investments  is  extremely  consequential, 
since  investments  and  the  management  of  income 
and  outgo  has  its  own  moral  hazard,  like  selection, 
though  differing  in  kind.  The  president  of  a  great 
casualty  company  has  already  suggested,  if  I 
rightly  remember,  the  insurance  of  this  hazard. 
For  these  investments  demand  the  highest  in- 
telligence, the  most  conspicuous  courage,  the 
noblest  integrity,  the  broadest  experience  and  the 
most  painstaking  study,  investigation  and  work. 


302 

Vast  sub-division  of  labor  is  required  and  the  con- 
servative policy,  which  looks  not  for  speculative 
profits,  but  a  reasonable  return  upon  the  basis  of  a 
principal  fairly  secured.     I  have  long  been  im- 
pressed with    the    fact  that  the  best  safeguard 
against  whatever  moral  hazard  is  here  involved  is 
the  universal  adoption  by  all  our  companies  of  the 
three  per  cent,  interest  assumption,  because  that 
step  would  automatically  insure,  where  integrity 
and  wisdom  of  management  prevails,  more  per- 
manent  and    less  speculative    investment.     This 
change  of  assumption  has  been  criticised,  and  still 
is,  as  unnecessary  and  ill-timed  ;  but  it  is  already 
being  applied  and,  within  a  few  years,  it  is  reason- 
able to  expect,  that  the  companies,  with  scarce 
exceptions,  will  be  united  in  this  regard.     Mr. 
Walter  C.  Wright,  in  his  review  of  life  insurance 
(American  Statistical  Society,  1888)  explained  its 
failures  as  due,  primarily,  to  extraordinary  eager- 
ness for  new  business  and  extravagant  outlay  to 
procure  it.     He  recognized  auxiliary  causes  like 
panics  and  dividend  apportionments  beyond  sure 
means  ;  but  his  germ  thought  was  that  the  public 
placed    too    great    confidence    in    mere    volume, 
**  which,  when  it  has  passed  a  certain  limit,"  he 
said,  "  has  no  practical  value  whatever."     Mr.  D. 
P.  Fackler  subsequently  elaborated  this  same  idea 
when  he  directed  attention  to  the  money  power 


303 

lodged  in  the  hands  of  a  few  men,  "possibly,"  he 
said,  "only  one  man  in  each  company"  and  he 
added  "any  great  further  increase  in  the  size  of 
our  largest  companies,  will — to  put  it  mildly — 
benefit  neither  the  policy-holder  or  the  public." 
He  went  further  than  this  and  his  remarks  will 
bear  consideration,  declaring,  before  this  very 
body,  "It  is  conceivable  that  comj^anies  might 
grow  to  such  a  size  that  they  could  not  be  properly 
managed  by  their  own  officers  or  satisfactorily 
supervised  by  the  State  ;  so  that  they  would  no 
longer  yield  the  best  attainable  results  for  their 
own  policy-holders."  The  safeguard,  suggested, 
was  legislation,  suspending  new  issues  when  a 
limit  of  two  hundred  millions  of  assets  was  reached. 
It  has  not  been  adopted,  but  momentum  continues 
to  vie  with  control  of  these  great  machines.  The 
first  of  1898  discovered  three  companies  with  two 
hundred  and  fifty-three,  two  hundred  and  thirty- 
five  and  two  hundred  millions  of  assets  respec- 
tively. The  ten  leading  companies  hold  over  one 
billion,  and  sixty-one  million  of  invested  funds, 
while  the^Teported  figures  for  forty-six  companies 
were  $1,272,000,000.  The  ten  Industrials,  in  addi- 
tion to  all  this,  held  $72,743,000,  of  which  $70,- 
844,000  was  held  by  three  alone.  It  is  probably 
safe  to  affirm  that  mere  size  will  reach  the  limit  of 
its  own  possibilities  in  time,  at  least,  so  far  as  the 


304 

insurance  accounts  are  concerned  ;  but  this  cannot 
be  predicated  of  assets  unless,  of  course,  new  busi- 
ness is  absolutely  and  definitely  discontinued  and 
then,  only,  after  a  time.  We  have  the  example  of 
one  excellent  company,  whose  outstanding  insur- 
ance has  remained  virtually  stationary  for  sixteen 
years,  but  its  assets  have  increased  within  that 
period  some  twelve  millions  of  dollars.  No  crit- 
icism is  here  intended  upon  investment  work.  I 
would  rather  say  that,  with  a  due  allowance  for 
the  support  which  that  department  has  received 
from  an  average  of  widely  distributed  and  varied 
investments,  and  from  other  recouping  resources, 
inherent  in  the  business  as  a  whole,  the  care  of 
life  insurance  trust  funds  has  been  for  twenty-five 
yeais  past  the  glory  of  management,  as  the  de- 
velopment of  business  has  been  its  achievement. 
Benjamin  Franklin's  remark  is  yet  true  ;  for  there 
is  nothing  to-day  which  surpasses,  in  point  of 
strength,  comfort  and  security  to  the  individual, 
an  investment  in  life  insurance  ;  but  that  moral 
hazard  exists  in  the  application  of  fundamental 
assumptions  to  policy  construction,  in  the  selec- 
tion of  risks,  in  the  impairment  of  net  rates  and 
in  the  investment  of  funds,  each  in  turn  due  to  a 
different  set  of  conditions,  should  be  kept  in  mind 
by  the  Directories  and,  so  far  as  possible,  they 
should  seek  for  safeguards  against  its  ill  effects. 


306 

There  now  remains  to  be  considered  that  other 
important  feature  of  our  life  insurance  system,  its 
supervision  by  the  States.  And  first  of  all,  it  is 
to  be  remarked,  that  this  supervision  has  unfor- 
tunately been  political  in  character  and  subject  to 
the  influence  of  the  lobby.  The  managers  have 
been  fairly  certain  of  their  tenure,  but  the  com- 
missioners, not.  This  uncertainty  itself  is  in  the 
nature  of  a  moral  hazard  because  it  involves  un- 
certainty and  inequality  of  supervision.  Now, 
supervision  by  States  has  these  defects :  It  is  not 
uniform  ;  it  makes  unnecessary  demands  ;  it  fixes 
arbitrary  measures  of  lapse  settlements ;  it  im- 
poses heavy  and  unequal  taxes ;  it  arbitrarily 
changes  its  spots  with  change  of  officer.  Some  de- 
partments of  supervision  have  a  somewhat  fixed 
character  and  purpose,  governing  themselves  by 
precedents  and  carrying  out  their  ideas  with  a  rea- 
sonable persistence.  Level  premium  insurance  has 
not  been  much  helped  by  State  supervision,  while 
the  people  cannot  be  said  to  have  been  always 
protected  against  speculative  and  unsound  forms 
of  insurance. 

The  fallacies  sometimes  had  their  largest  run 
where  State  supervision  was,  in  fact,  most  intelli- 
gent— but,  at  the  same  time,  unable  to  give  them 
timely  quietus.  Supervision  was  organized  to 
protect  the  citizens  of  individual  States ;  also,  to 


806 

strengthen  the  public  standing  of  the  solvent  com- 
panies. This  supervision,  as  a  means  to  an  end,  is 
not  bad.  It  is  to  be  desired  in  connection  with 
great  corporations  and  it  is  to  be  regarded  as  of 
service  to  the  people.  The  character  of  State  su- 
pervision, however,  is  deficient  on  account  of  the 
defects,  already  named,  and  renders  the  different 
forms  of  life  insurance  more  costly  to  the  people 
without  always  making  it  more  safe.  It  seems 
sometimes  as  if  State  supervision  had  been  out- 
stripped and  that  it  now  no  longer  responds  to  the 
national  character  which  life  insurance  has  as- 
sumed. "Qui  custodiet  custodesf''  The  ofiice 
should  be  taken  out  of  politics  and  itself  pro- 
tected. Capacity  and  performance,  measured  by 
civil  service  standards,  are  the  proper  guides  both 
for  the  selection  of  supervisors,  and  their  continu- 
ance. I  have  no  wish  to  enter  into  the  merits  of 
the  argument  for  federal  supervision,  but  feel  con- 
fident, could  that  be  achieved,  that  the  costs  of 
supervision  would  be  reduced  and  its  quality  im- 
proved. For,  think  what  we  may  the  United 
States  has  developed  so  rapidly  as  a  great  nation, 
that  public  corporations,  themselves  national  and 
international  in  their  operations,  and  collecting 
and  distributing  the  great  values  which  life  insur- 
ance already  handles,  cannot  fail  to  be  benefited 
in  the  interest  of  the  public  by  being  supervised 


307 

broadly  instead  of  narrowly.  At  the  same  time,  I 
confess  that  local  supervision  has  contributed  to 
the  confidence  with  which  the  people  of  different 
sections  have  accepte  dour  institutions.  For  they 
have  faith  in  their  own  officers,  whom  they  legally 
install  in  office  by  their  ballot,  or  as  the  result  of 
their  ballot.  It  is  a  part  of  their  self-government. 
Nor  would  it  be  desirable,  if,  by  any  chance, 
National  Supervision  became  a  fact  to  exclude  or 
even  diminish  publicity.  What  is  needed  is  unified, 
effective  supervision  at  reduced  costs.  This  busi- 
ness will  prosper  most  with  a  firm  hold  on  the  pub- 
lic mind.  The  cheapest  and  ultimate  premium 
which  it  must  pay  to  secure  this  hold  is  publicity 
and  truth.  For  it  belongs  not  to  any  man 
or  set  of  men,  but  to  the  nation  and  may 
now  be  ranked  as  one  phase  of  its 
national  development,  inspired  by  the  energy, 
providence  and  thrift  of  its  people.  To  quote 
from  President  Low  :  "  Theoretically,  I  cannot 
believe  that  there  is  any  reason  why  the  demand 
for  publicity  in  relation  to  the  action  of  corpora- 
tions should  not  be  carried  to  any  detail  to  which 
it  may  be  necessary  to  carry  it,  in  order  to  secure 
the  result  of  absolute  honesty,  as  toward  stock- 
holder, creditor  and  the  public."  He  uses  the 
words,  ''theoretically,"  and  ''may  be  necessary," 
which  saves  the  quotation  from  doing  honor  to  a 


308 

certain  class  of  details  which  isolated  supervision 
has  more  recently  required  us  to  transcribe.  For 
supervision  should  stand  related  to  the  business  in 
a  friendly  attitude — its  proper  limitations  are  ex- 
pressed when  we  say  it  should  not  assume  to  make 
rates,  to  dictate  policy  forms,  or  to  limit  competi- 
tive expenses.  It  may  with  propriety  continue  to 
suggest  a  standard  for  assumed  net  rates, 
policy  valuations  and  a  minimum  non-forfeit- 
ure. It  is  also  wise  to  collect  details  of 
income  and  outgo,  insurance  issued  and 
cancelled,  and  such  other  matters  as  may  be 
deemed  and  really  are  essential  to  discovery  or  an- 
ticipation of  unwholesome  conditions.  It  will  also 
serve  the  public  by  independently  determining,  at 
reasonable  intervals,  the  present  worth  and  quality 
of  a  company's  investments.  This  work  should  be 
thoroughly  done  by  competent  men  and  without 
unnecessary  duplication,  expensive  delays  or  an- 
noyance. When  so  done,  it  will  probably  be  alto- 
gether unnecessary  to  repeat  the  examination 
again  for  a  period  of  at  least  five  years.  The 
wisdom  of  yearly  investigations  to  the  utmost 
farthing  and  detail  is  highly  questionable.  In  any 
event,  the  results  would  be  more  beneficial  and  sat- 
isfactory to  the  public,  if  the  relations  between 
supervisors  and  the  companies  be  maintained  upon 
a  peace  instead  of  a  war  footing.     To  say  the 


309 

truth,  however,  it  has  too  often  been  the  status  that 
the  companies  might  justly  exclaim:  '*  Write, 
cancel  and  be  hopeful,  for  to-morrow  we  will  have 
a  new  commissioner  !"  What  a  company,  a  regi- 
ment, rather,  of  noble,  earnest  public  men  have 
supervised  our  life  insurance  work  !  They  are  all 
gone  from  public  station — but  the  institution  by  the 
grace  of  its  own  management  yet  lives  to  discharge 
its  beneficent  work. 

What  care  you  about  rebating  any  more  than  he 
who  makes  it  the  motif  of  a  charming  novelette, 
or  he,  who  declares  that  the  way  to  stop  rebating 
permanently  is  to  give  the  agent  paris  green,  in  ad- 
vance ?  The  State  cannot  stop  it  without  the  co- 
operation of  the  companies  ;  but,  if  it  thinks  it  can 
and  can  also  make  rates,  determine  expense  ac- 
counts, schedule  commissions,  make  policies,  limit 
indisputability,  define  a  proper  defence  against 
insurance  fraud  and  all  that — why  not  legislate  the 
companies  entirely  out  of  existence  and  let  the 
State  manage  the  whole  business  from  day  to 
day  ?  It  is  a  fair  sequitur,  although  it  will  be  said 
that  neither  supervision  nor  the  public  desire  such 
a  result.  Well,  if  not  that,  simply  learn  and  tell 
the  people  that  this  and  that  company  is  solid  and 
fair  dealing  and  likely  to  remain  so  for  the  future, 
and  economize  time,  energy  and  funds.  Then  add, 
so  far  as  may  be  if  state  supervision  continues, 


310 

uniformity  in  all  things,  and  thus  contribute  to 
the  solution  of  the  great  problem  of  guaranteed 
protection.  Competition  will  work  out  the  prob-: 
lem  of  expense,  etc.,  because  its  day  has  arrived. 
Less  outside  supervision  and  more  inside  manage- 
ment will  be  a  good  thing  for  the  public,  in 
addition  to  the  good  things  they  already  possess. 
For  by  it  the  merchant  augments  his  credit ;  the 
manufacturer  perfects  control  over  his  estate  ;  the 
capitalist  swings  his  ship  to  this  anchor  ;  the  arti- 
san contemplates  the  approach  of  old  age  with 
self-respect ;  but,  above  all,  gentlemen,  no  argu- 
ment is  better  than  the  old  story — it  is  the  safe- 
guard of  the  widow  and  the  child.  It  crowns 
with  respect  the  offspring  of  the  average  life, 
which  is  not  great  and  rich,  but  "  all  the  world  " 
to  them.  Whatever  cares  for  and  protects  it,  pro- 
tects them.  So  write  upon  the  shield  of  life  insur- 
ance the  words  of  the  Three  Guardsmen:  ''One 
for  all  and  all  for  one." 


ARE   NON-FORFEITURE    LAWS 
EXPEDIENT  ? 

AND 

IF  so— WHAT  SURRENDER  VALUES  MAY  SAFELY 
BE  REQUIRED  ? 

DAVID  PARKS  FACKLER  : 

THE  question  for  the  present  seems  to  narrow 
itself  to  what,  if  anything,  should  be  re- 
quired from  the  regular  or  legal  reserve  life  insur- 
ance companies  ;  for,  though  many  of  the  other 
life  insurance  organizations  issue  contracts  which 
are  practically  the  same  as  those  of  the  regular 
companies,  the  State  legislatures  seem  to  con- 
sider them  not  amenable  to  legal  restrictions  re- 
garding reserve,  and  consequently  not  in  the  matter 
of  surrender  value  allowances .  In  several  cases, 
however,  these  co-operative  or  assessment  associa- 
tions charge  premiums  quite  as  large  as  the  non- 
participating  premiums  of  some  of  the  regular  com- 


312 

panies  for  corresponding  forms  of  insurance,  and 
also  make  contracts  requiring  definite  reserves  of 
some  kind  or  other.  Moreover,  the  mutuality  of 
many  of  these  institutions  is  entirely  imaginary, 
as  they  are  often  controlled  by  an  inner  ring  and 
not  at  all  by  the  insured,  any  more  than  any  stock 
company  ;  but  they  have  thus  far  escaped  legisla- 
tion of  the  character  applying  to  regular  companies, 
because  they  were  supposed  purely  mutual.  I  do 
not  intend  by  these  remarks  to  make  any  reflections 
against  any  of  these  organizations,  but  only  to 
show  that  they  have  no  right  to  be  considered  more 
mutual  than  the  regular  companies. 

All  forms  of  insurance  should  be  alike  before  the 
law,  and  no  one  system  should  be  specially  favored 
by  the  government.  As  it  is,  however,  the  States 
are  guilty  of  inconsistency  in  imposing  practically 
all  their  requirements  on  the  regular  forms  of  in- 
surance. The  regular  companies  are  compelled  to 
hold  certain  arbitrary  amounts  of  reserve  for  all 
contracts  that  continue  in  force,  and  along  with 
this,  many  States  require  them  to  give  all  policy- 
holders, who  break  their  contracts,  certain  allow- 
ances either  in  insurance  or  in  cash,  regardless  of 
the  circumstances  under  which  the  policies  may  be 
terminated. 

Life  insurance  companies  are  associations  of  indi- 
viduals, who  either  desire  insurance  for  themselves, 


313 

or  seek  to  do  a  safe  and  remunerative  business  as 
stockliolders,  and  there  seems  to  be  no  reason  why 
the  State  should  specially  interfere  with  the  liberty 
of  citizens  to  control  their  own  corporations  thus 
formed,  any  more  than  it  would  attempt  to  control 
companies  formed  to  do  mercantile  business.  They 
are  given  no  special  privileges  in  return  for  which 
the  State  may  properly  demand  control  of  their 
operations.  Of  course,  however,  all  corporations 
like  all  citizens,  are  properly  amenable  to  any, 
regulations  requisite  for  the  safety  and  highest 
good  of  the  State  and  people  generally.  How  far 
the  State  may  wisely  and  beneficially  supervise  the 
action  of  its  citizens,  either  singly  or  when  associ- 
ated together  in  companies,  will  always  be  a  ques- 
tion on  which  opinions  will  more  or  less  differ,  and 
it  will  be  interesting  to  consider  what  character  of 
legislation  in  the  past  seems  to  coincide  more  gen- 
erally with  liberty,  stability  and  progress,  as  a 
brief  historical  retrospect  may  give  us  some  solid 
reasons  for  taking  a  definite  standpoint,  from  which 
to  view  the  important  question  before  us . 

The  governments  of  the  human  race,  so  far  as 
history  shows  us,  were  originally  modeled  after  the 
family  ;  first,  the  father,  then  the  chief  of  the  tribe, 
and  then  the  despot  ruling  with  unbridled  will 
over  many  tribes.  After  some  generations,  the  in- 
justice and  cruelty  often  connected  with  this  form 


314 

of  government  led  many  races  to  adopt  something 
of  a  republican  form,  in  which  the  State  took  the 
place  of  the  despot  as  the  source  of  authority.  This 
form  afterwards  found  its  highest  exponent  in  the 
Roman  republic,  which,  for  a  time,  combined  con- 
siderable liberty  of  the  citizen  with  great  power  in 
the  State.  Gradually,  however,  the  centralized 
authority  completely  overshadowed  individual  lib- 
erty, the  republic  became  an  empire,  and,  spread- 
ing over  the  civilized  world,  threatened  a  complete 
extinction  of  individual  freedom. 

Fortunately  for  mankind,  the  spirit  of  liberty 
survived  in  Germany,  even  after  Gaul  and  Britain 
had  become  latinized,  and  thence,  after  the  Ro- 
man empire  decayed,  came  the  Saxon  invaders, 
who  swept  away  Latin  civilization  in  England,  and 
in  that  seagirt  land  implanted  the  principles  of 
freedom,  which  thus  continued  to  exist  in  their 
new  home,  even  after  their  native  Germany  had 
become  latinized  through  the  introduction  of 
Christianity  from  Rome.  Thus  it  is  that  in  Eng- 
land and  the  English-speaking  countries,  citizens 
enjoy  very  much  more  of  that  original  Teutonic 
liberty  than  is  now  found  in  Germany  itself,  where 
autocracy,  bureaucracy  and  red  tape  are  rife,  while 
in  other  lands  generally  we  find  paternalism, 
either  of  the  Latin  or  of  the  Asiatic  type.  May 
we  not  reasonably  hold  that  as  the  greatest  happi- 


ai5 

ness  and  prosperity  are  found  associated  with 
p-hat  are  known  as  Anglo-Saxon  principles  of 
government,  therefore  those  principles  are  the 
best  for  the  English-speaking  race. 

The  principles  of  government  of  which  the  Eng- 
lish-speaking races  are  the  exponents  may  be 
stated  to  be,  that  government  shall  interfere  with 
individual  liberty  no  further  than  appears  to  be 
absolutely  necessary,  and  that  enterprises  of  all 
kinds  shall  be  untrammeled  and  untaxed,  except 
as  the  public  good  may  clearly  require.  Among 
nearly  all  other  civilized  races  there  prevails  the 
paternal  idea  of  government  under  which  the 
State  endeavors  to  control  its  citizens  in  all  re- 
spects, just  as  though  they  were  in  a  state  of  tu- 
telage, and  would  in  all  probability  go  astray 
unless  closely  supervised.  The  Anglo-Saxon  idea 
assumes  that  citizens  will  probably  act  reasonably 
in  all  their  treatment  of  others,  and  that  each  will 
exercise  foresight  and  intelligence  in  all  business 
matters.  The  paternal  idea  of  government  assumes 
the  opposite — that  citizens  can  not  be  trusted  to 
deal  reasonably  and  justly  with  each  other  and 
that  the  masses  will  not  exercise  sufficient  intelli- 
gence and  care  to  protect  themselves  against  im- 
position. The  Anglo-Saxon  system  makes  it  neces- 
sary that  men  should  use  wisdom  and  judgment 
in   their    daily    business,    and  thus   conduces  to 


316 

increase  their  intelligence  and  self-reliance,  while 
the  paternal  system,  by  placing,  ov  pretending  to 
place^  safeguards  on  every  side,  tends  to  make 
them  less  keen  and  vigilant  in  looking  out  for  their 
own  interest,  and  thus  indirectly  saps  the  very 
foundations  on  which  all  political  liberty  must 
rest ;  viz.,  the  vigilant  intelligence  of  the  citizens. 
Life  insurance  took  its  rise  in  that  country, 
which  is  the  birthplace  of  modern  liberty,  and  has 
found  its  greatest  development  in  that  country 
and  in  its  offspring  in  the  United  States,  Canada 
and  Australia.  In  this  country,  however,  life  in- 
surance has  been  much  trammeled  by  legislation, 
while  in  the  place  of  its  origin  it  has  been  left 
almost  entirely  free,  and  has  developed  naturally 
under  the  influences  of  competition  and  extended 
experience.  Companies  there  are  not  required  to 
hold  any  definite  amounts  of  reserve,  but  only  to 
make  clear  and  definite  statements  of  their  condi- 
tion, leaving  the  public  to  judge  for  themselves  as 
to  each  corporation.  The  result  has  been  that, 
speaking  generally,  English  companies  have  been 
much  quicker  than  American  companies  to  adopt 
liberal  features.  Thus,  while  it  is  only  lately  that 
loans  on  [policies  and  cash  surrender  values  have 
become  the  rule  among  American  companies,  they 
have  been  in  vogue  among  British  companies  for 
over  thirty  years,  as  1  showed  some  twenty  years 


317 

ago  in  a  circular  giving  extracts  from  the  literature 
of  about  thirty  of  the  oldest  English  companies, 
and  urging  similar  liberality  here. 

In  England  the  fiction  that  all  laws  come  from 
the  Sovereign  has  made  people  more  jealous  for 
personal  liberty  than  here,  where  the  power  is  sup- 
posed to  come  from  the  people  ;  consequently  in 
some  respects  the  liberty  of  the  ''  subject  "  in  Eng- 
land is  less  restricted  than  the  freedom  of  the  citi- 
zen in  the  republic. 

Legislative  intermeddling  in  this  country  has 
kept  our  companies  from  developing  as  freely  as  in 
England,  and  in  some  cases  has  injuriously  affected 
the  interests  of  the  policy-holders  :  thus,  when  the 
New  York  Legislature  in  1879  passed  the  present 
non-forfeiture  law,  it  actually  had  the  effect  of 
reducing  the  paid-up  policies  given  by  some  of  the 
companies,  because  under  the  color  of  obeying  the 
law  they  were  able  to  give  less  paid-up  insurance 
than  they  had  previously  felfc  compelled  to  give 
under  the  influence  of  competition. 

As  to  the  first  part  of  the  subject  ;  viz.,  "  Should 
the  state  require  the  companies  to  make  any  sur- 
render value  allowances?"  I  think  experience 
teaches  that  it  is  more  expedient  in  an  intelligent 
nation,  such  as  ours,  that  the  government  should  not 
attempt  to  dictate  what  allowances  should  be  made. 
The  same  law  would  not  apply  with  equal  justice 


318 

to  all  companies  under  the  same  circumstances, 
or  even  to  any  one  company  at  different  periods  of 
its  history.  A  company  which  charges  large  pre- 
miums can  afford  to  make  better  surrender  value 
allowances  than  can  a  company  with  low  premiums. 
The  passage  of  a  law  on  the  subject  tends  to  make 
it  harder  for  a  company  to  do  business  with  low 
premiums,  or  on  the  non-participating  plan,  which 
hindrance  is  not  in  the  public  interest,  for  as  a 
check  on  too  high  premiums  and  extravagance  of 
management  there  is  no  more  pracftical  aid  than  the 
continued  success  of  stock  companies. 

In  times  of  prosperity,  when  business  is  easily 
obtained,  a  company  can  afford  to  treat  withdraw- 
ing members  much  more  liberally  than  in  times 
of  depression,  when  it  may  be  impracticable  to 
obtain  new  insurance  to  replace  that  which  is 
withdrawn  but  a  law  would  make  no  allowances 
for  circumstances.  The  wisest  expert  can  not 
surely  foresee  the  future  trend  of  the  business 
and  all  the  peculiar  contingencies  that  may 
arise,  and  much  less  can  the  legislatures  do  so. 
The  original  Massachusetts  non-forfeiture  law  was 
devised  to  suit  only  the  simplest  form  of  whole- 
life  insurance,  no  other  form  being  thought  of  at 
the  time,  but  soon  afterwards  other  forms  were  in- 
troduced to  which  it  was  grotesquely  unsuited  ; 
even  its  author  confessed  its  failure  and  tried  his 


319 

hand  at  legislation  again,  only  to  make — in  the 
judgment  of  all  disinterested  experts — a  worse  fail- 
ure than  before. 

.  In  this  way  laws,  which  may  seem  reasonable  at 
this  time,  may  prove  to  be  utterly  unsuited  to  new 
conditions  existing  ten  years  hence.  Many 
thoughtful  insurance  men  consider  that  the  great- 
est dangers  for  life  insurance  are  those  which  may 
come  from  unwise  legislation.  Against  a  higher 
mortality,  even  a  temporary  pestilence,  againstja 
low  rate  of  interest  and  occasional  losses  from  in- 
vestments, they  can  provide  premiums  and  reserves, 
which  will  probably  prove  adequate,  but  against 
the  possibilities  of  unwise  legislation  no  safeguard 
can  be  provided,  as  the  danger  is  beyond  calcula- 
tion. 

We  come  now  to  the  second  part  of  the  subject ; 
viz.,  "  What  surrender  values  n-^ight  safely  be  re- 
quired by  law  ?  " 

If  it  be  right  for  the  State  to  legislate  in  any 
way  regarding  insurance,  it  must  be  admitted  by 
all  that  its  first  duty  is  to  assure  the  solvency  of 
the  companies  and  the  final  payment  of  all  claims 
under  policies  that  are  kept  in  force.  Any  rights 
or  equities  of  those,  who  discontinue  their  policies, 
must  be  held  to  be  entirely  secondary  to  the  first 
and  primary  obligations  just  mentioned.  Probably 
no  one  will  deny  this.     It  follows,  therefore,  that, 


320 

if  any  surrender  values  either  in  paid-up  insurance 
or  in  cash  are  to  be  established  by  law,  they  should 
be  on  such  a  conservative  basis  that  their  allow- 
ance can  not  possibly  endanger  the  safety  of  any. 
company  under  the  most  disastrous  circumstances 
and  even  if  on  the  brink  of  insolvency.  This  is 
particularly  the  case  with  regard  to  enactments 
prescribing  cash  surrender  values,  for  under  such 
laws  a  company  that  is  nearly  insolvent  might  be 
rendered  entirely  so  by  large  numbers  of  demands 
for  cash  values,  compelling  it  to  sacrifice  its  secur- 
ities to  obtain  cash.  It  is  clear,  therefore,  that  the 
government  should  not  prescribe  anything  more 
than  a  minimum  allowance,  but  even  such  action  is 
of  doubtful  expediency,  for  it  is  extremely  un- 
likely that  any  company  would  refuse  to  pay  such  a 
minimum  allowance,  even  if  there  were  no  law, 
while  the  passage  of  such  a  law  might  lead  many 
companies  to  argue  that  the  government  allowance 
was  about  the  equitable  amount,  and  thus  allow 
less  than  they  would  otherwise  have  done.  As  be- 
fore stated,  such  was  the  immediate  result  of  the 
passage  of  the  New  York  non-forfeiture  law  in  1879 
in  the  case  of  some  companies. 

If  it  be  decided  that  the  government  should  regu- 
late surrender  value  allowances,  it  will  generally 
be  admitted  that  such  allowances  should  only  be 
in  the  form  of  insurance.     The  original  contract 


321 

having  been  for  insurance,  an  allowance  in  paid-up 
insurance  can  be  made  with  less  violation  of,  and 
change  in,  the  original  contract  than  any  other 
way.  If  the  withdrawing  policy-holder  is  an  ex- 
ceptionally good  risk  a  settlement  in  paid-up 
insurance  will  give  the  company  a  part  of  the 
future  profit  it  would  realize  under  the  original 
contract,  and  it  will  only  be  necessary  to  compen- 
sate the  company  for  losing  the  portions  of  future 
premiums  that  would  have  contributed  to  pay  the^ 
fixed  expenses,  and  in  general  have  added  stability 
to  the  company. 

It  may  naturally  be  expected  that  I  should  sug- 
gest some  general  rule  for  computing  paid-up  poli- 
cies suitable  for  adoption  as  a  law,  and  I  will 
endeavor  to  do  so,  assuming  that  only  minimum- 
amounts  should  be  fixed  by  law.  We  must  prem- 
ise that  the  policy-holder  is  under  contract  to  pay 
a  certain  gross  premium,  the  collection  of  which, 
it  is  assumed,  costs  the  company  nothing.  We 
may  fairly  assume  that  he  is  in  excellent  health, 
with  a  death  risk  only  about  three-fourths  of  that 
according  to  the  Combined  Experience  table  ;  for 
the  average  death  rate  in  most  companies  for  all 
the  lives,  both  healthy  and  diseased  together,  is- 
generally  only  about  eighty  per  cent  of  the  rate  by 
that  table.  I  would  suggest  this  rule  ;  viz.,  from 
tables  based  on  a  rate  of  mortality  three-fourths- 


322 

that  of  the  Combined  Experience,  and  with  four 
per  cent,  interest,  find  the  present  value  of  the  sum 
payable  by  the  company ;  from  that  deduct  the 
value  of  an  annuity  of  the  future  gross  premiums, 
as  shown  by  the  same  tables ;  the  difference  will 
represent  the  cash  amount  required  to  carry  the 
insurance  without  allowing  further  dividends ; 
then  find  the  reversionary  amount,  which  this  cash 
will  purchase  (according  to  the  same  tables),  and 
it  will  be  the  paid-up  policy,  which  the  company 
can  afford  to  give  even  under  the  most  desperate 
circumstances,  provided  interest  is  not  over  four 
per  cent. 

This  rule  would  give  very  small — if,  indeed,  any 
— paid-up  insurance  during  the  earlier  years  of  a 
policy.  For  one  of  $1,000  on  the  ordinary  life 
plan  issued  at  age  thirty-five  with  a  premium  of 
$25  a  year,  there  would  be  no  paid-up  value  until 
after  eleven  years  ;  after  fifteen  years  it  would  be 
$57,  and  after  twenty  years  $333  ;  all  these  are  less 
than  by  the  New  York  law,  but  after  twenty-five 
years  the  paid-up  would  be  $476 — or  as  much  as  by 
the  New  York  law — and  for  all  years  after  that 
the  allowance  would  be  much  more  than  by  that 
law. 

For  a  ten-payment  life  policy  of  $1,000  issued  at 
age  thirty-five  with  a  i^remium  of  $50  a  year,  the 
paid-up  value  after  five  years  would  be  only  $329, 


323 

or  less  than  by  the  New  York  law,  but  after  nine 
years  would  be  $867,  or  more  than  by  the  New 
York  law,  which  would  give  only  $600.  The  New 
York  law  has  some  of  the  absurdities  of  the  Mass- 
achusetts law,  and  would  treat  this  man,  who  is 
giving  up  only  about  one-tenth  of  his  policy,  just 
as  though  he  were  giving  it  all  up.  The  payment 
of  one  more  premium  would  give  him  a  full-paid 
policy  for  $1,000 ;  but  for  the  failure  to  pay  that 
one  premium  the  New  York  law  would  cut  his  in- 
surance down  to  $600,  while  by  the  more  scientific 
method  I  have  shown  it  should  be  at  the  very 
least  $867. 

Competition  already  compels  the  companies  to 
make  liberal  guarantees  of  paid-up  insurance  ;  in 
fact,  the  companies  often  guarantee  more  than  they 
can  afford,  and  there  is  really  more  danger  that  the 
companies  will  be  too  liberal  rather  than  not  liberal 
enough  ;  for  nearly  all  the  companies  under  the 
press  of  competition  are  now  giving  larger  paid-up 
policies  than  they  should  under  all  limited-pay- 
ment life  policies  that  are  surrendered  after  a  few 
years'  payments.  The  reserves  required  for  the 
paid-up  policies  are  fully  as  large  as  those  sup- 
posed to  have  accumulated  on  the  original  con- 
tracts, and,  in  fact,  are  much  larger  than  the  sums 
actually  saved  from  the  premiums  after  paying  the 
heavy  expenses  that  are  now  the  rule. 


324 

Probably  all  will  concede  tliat  if  the  government 
interferes  to  regulate  surrender  value  allowances^ 
it  should  prescribe  insurance  rather  than  cash.  If, 
however,  legislation  should  at  length  go  further 
and  determine  the  minimum  amount  of  cash  that 
should  be  returned  as  a  surrender  value,  the  calcu- 
lation of  the  cash  value  should  be  made  with  refer- 
ence to  the  paid-up  insurance  primarily  allowable 
rather,  than  with  regard  to  the  original  policy  ; 
that  is  to  say,  if  under  the  law  a  certain 
$1,000  policy  would  on  surrender,  or  lapse,  en  title- 
its  holder  to  a  paid-up  policy  of  $400,  the  cash 
surrender  value,  if  any,  that  may  be  allowable  as 
an  alternative,  should  be  computed  for  the  paid-up 
policy  and  not  on  the  original  policy,  for  that  is 
the  only  sure  way  of  making  the  two  values  har- 
monize. With  the  paid-up  policy  allowance,  made- 
on  a  reasonable  and  safe  basis,  it  will  be  a  com- 
paratively easy  matter  to  make  a  fair  estimate  of 
the  present  cash  value  of  such  a  reversion,  which 
necessarily  will  be  also  a  reasonable  and  safe  cash 
value  for  the  original  policy,  while  it  would  be- 
much  more  difficult  to  make  a  direct  calculation 
of  the  cash  surrender  value  of  the  original  contract 
in  such  a  way  as  to  be  in  harmony  with  the  paid- 
up  policy  and  its  cash  value.  Consistency  is  too 
little  considered  in  these  matters. 
For  example,  suppose  a  man  is  told  he  can  have 


325 

-a  paid-up  policy  for  $600,  or  else  $200  in  cash  and 
then  asks  whether,  in  case  he  takes  the  paid-up 
insurance,  he  can  afterwards,  if  necessary,  sur- 
render it  for  $200  or  more  ;  if  he  finds  that  the  cash 
value  would  be  only  $150,  he  will  be  disgusted  at 
the  inconsistency,  and  probably  decide  to  take  the 
$200  at  once.  This  is  one  of  the  absurdities  of  the 
Massachusetts  law,  which  proceeds  to  estimate  the 
cash  surrender  value  first  and  then  deduce  the 
paid-up  policy  therefrom.  A  man,  who  has  paid 
nine  premiums  on  a  ten-payment  life  policy  and 
wishes  to  take  a  paid-up  policy,  is  taxed  for  a  sur- 
render charge  just  as  though  he  were  about  to 
withdraw  from  the  company  entirely,  though  as  a 
fact,  he  will  give  up  only  about  one-tenth  of  his 
insurance.  If  he  had  entered  for  $10,000  at  age 
twenty- one,  he  would  be  told  that  his  paid-up 
policy  would  be  $8,620,  or  his  cash  value  $2,637.80. 
If  he  takes  the  ^'paid-up,"  and  then  wishes  to 
surrender  it  shortly  afterwards  for  cash,  he  finds 
that  its  cash  value  is  only  $2,544.45.  This  every- 
way unwise  law,  therefore,  makes  it  more  to  one's 
advantage  to  take  a  cash  value  rather  than  paid-up 
insurance,  while  all  rules  or  laws  should  tend  to 
favor  the  man  who  will  continue  insured. 

If  a  man  is  entitled  to,  or  already  has,  a  certain 
amount  of  paid-up  non-participating  insurance,  we 
may  compute  its    minimum  equitable  cash  sur- 


326 

render  value  in  a  very  simple  way.  The  risk  of  the 
withdrawal  of  the  better  lives  can  be  most  logi- 
cally and  definitely  met  by  assuming  that  those 
who  withdraw  belong  to  a  class  of  lives  having  a 
rate  of  mortality  bearing  a  certain  definite  relation 
to  some  standard  table,  such  for  example,  as  the 
Combined  Experience.  As  most  good  companies 
have  an  •  average  death  rate  about  eighty  per  cent, 
of  that  by  the  Actuaries'  table,  it  is  reasonable  to 
assume  that  the  best  lives — those  which  with- 
draw— have  a  death  rate  only  fifty  per  cent,  of  that 
by  the  Actuaries'  table,  or  about  two-thirds  of  that 
prevailing  amongst  the  whole  company. 

If  we  find  the  value  of  the  paid-up  insurance 
from  tables  computed  on  this  hypothetical  death 
rate,  with  a  rate  of  interest  as  high  as  a  company 
can  reasonably  expect  to  realize  for  some  years  to 
come,  the  net  or  theoretical  value  so  computed  is 
clearly  the  amount  which  a  company  could  cer- 
tainly afford  to  pay  under  ordinary  circumstances. 
(I  have  such  tables  computed  on  several  rates  of 
interest,  and  have  used  them  for  many  years  past, 
but  it  does  not  seem  necessary  to  give  any  example 
from  them.) 

To  guard  against  the  contingency  that  the  cash 
value  might  be  demanded  in  times  of  great  finan- 
cial stress,  it  should  be  provided  that  a  certain 
percentage  might  be  deducted  from  the  theoretical 


327 

value,  as  above  computed,  to  cover  any  loss  that 
the  company  might  experience  through  being  com- 
pelled to  convert  securities  into  cash  during  such 
financial  troubles.  How  great  might  be  the  loss  from 
forced  sales  of  securities  will  be  acknowledged  by 
all  who  had  any  experience  of  the  crisis  which  began 
in  1873  and  continued  for  many  years  afterwards, 
and  also  of  those  in  1893  and  other  recent  years. 

Many  four  per  cent  and  ^ve  per  cent  securities, 
now  selling  above  par,  and  which  were  also  at  par 
twenty-five  years  ago,  have,  in  the  meantime,  sold 
for  ten  and  even  twenty  per  cent  less  than  their 
apparent  value,  and  may  very  possibly  be  again 
equally  depressed.  A  margin  of  twenty  per  cent 
would  not  be  too  much  to  allow  for  safety.  In  1873 
Michigan  and  Illinois  six  per  cent  State  bonds  sold 
at  eighty-five,  or  more  than  twenty  per  cent  under 
their  previous  and  later  values.  Probably  many 
here  can  remember  some  of  the  many  cases  of  good 
railroad  bonds  selling  for  twenty  per  cent  under 
their  value  during  the  long  depression  from  1873 
to  1879.  Real  estate  mortgages,  the  best  of  securi- 
ties in  ordinary  times,  might  be  quite  unsalable  in 
such  periods. 

Though  no  life  insurance  company  has  yet  been 
rendered  insolvent  through  a  run  on  it  for  cash 
surrender  values,  something  exactly  parallel  hap- 
pened in  the  case  of  a  Philadelphia  fire  insurance 


328 

company,  which  had  a  large  number  of  ^*  perpetual 
policies"  that  entitled  their  holders  to  demand  a 
return  of  their  deposits.  These  deposits  were  in- 
vested on  bond  and  mortgage,  and  in  1871  when 
the  Chicago  fire  occurred  the  company  was  unable 
to  meet  the  demands  for  these  surrender  values, 
and,  though  fully  able  to  pay  all  its  fire  losses,  had 
to  go  out  of  business. 

While  I  would  not  assert  that  the  general  methods 
above  indicated  are  the  only  safe  and  scientific 
ways  of  computing  minimum  cash  and  paid-up  val- 
ues, I  am  sure  that  any  method  based  directly  upon 
the  standard  reserves  must  be  very  complicated  or 
else  very  inconsistent  and  unsafe  in  many  cases. 

At  this  point  allow  me  to  state  that  I  am  not, 
and  never  have  been,  opposed,  but  always  favor- 
able, to  guaranteeing  cash  surrender  values,  pro- 
vided the  matter  is  left  to  the  discretion  of  each 
company.  Thirty  years  ago,  in  1868,  two  com- 
panies adopted  the  system  by  my  advice,  but  the 
guarantees  were  much  less  than  under  the  Mass- 
achusetts law  and  extended  only  for  ten  years  with 
a  proviso  for  extension  during  the  next  ten  years 
thereafter. 

In  the  foregoing  remarks  I  have  endeavored  to 
show  that  history  teaches  in  general  that  the  great- 
est prosperity  and  happiness  prevail  where  govern- 
ments do  not  interfere  much  with  private  and  cor- 


329 

porate  affairs  ;  that  in  Great  Britain,  where  there 
are  no  non-forfeiture  laws  and  scarcely  any  restric- 
tions, the  companies  have  treated  the  insured  with 
a  liberality  which  has  only  lately  become  the  gen- 
eral practice  here,  where  legislation,  apparently  in 
the  interest  of  the  insured,  has  really  operated 
against  them  ;  and,  finally",  I  have  sought  to  show 
that  the  questions  involved  are  beyond  the  under- 
standing of  legislators,  and  such  as  should  properly 
be  left  to  the  companies  themselves,  and  I  would 
close  by  saying  that  all  legislatures  disposed  to 
dabble  in  non-forfeiture  law  should  be  warned  by 
the  sad  experience  of  the  old  Bay  State,  which  in 
the  past  has  been  so  ready  to  impose  onerous  and 
•even  dangerous  burdens  on  its  regular  companies, 
while  it  has  allowed  a  free  hand  to  such  swindles 
as  the  ''Iron  Hall"  and  other  "' co-duperative^^ 
concerns,  and  that,  too,  after  the  swindles  had 
been  most  clearly  exposed  and  denounced  by  the 
Insurance  Commissioner. 


wm;  d.  whiting  : 

I  MOST  heartily  agree  with  the  main  conclusion 
of  Mr.  Fackler,  to  the  effect  that  all  so-called 
non-forfeiture  laws  should  be  repealed,  [as  being 
arbitrary,  unscientific,  calculated  rather  to  reduce 


330 

than  increase  the  surrender  values  which  com- 
panies are  now  inclined  to  grant  voluntarily,  and 
wholly  unnecessary  in  our  present  state  of  compe- 
tition, safeguarded  by  the  gain  and  loss  exhibit 
which  compels  each  company  to  state  publicly  its 
treatment  of  policy-holders  in  this  respect.  But  I 
am  unable  to  concur  with  his  extreme  laissezfaire 
views  as  being  applicable  to  American  insurance, 
or  to  overlook  the  fact  that  at  one  time  our  non- 
forfeiture laws  played  an  important  and  useful 
part  in  preventing  obvious  fraud  and  liberalizing 
American  practice.  The  growth  of  insurance  in 
Great  Britain,  and  the  characteristics  of  its  people, 
are  quite  dissimilar  to  those  of  the  United  States, 
thereby  making  the  usages  of  the  former  not  always 
a  safe  guide  for  the  latter.  English  insurance  was 
a  slow  and  careful  development  into  an  unknown 
enterprise,  among  a  conservative  people,  conducted 
largely  by  professional  men.  In  our  country  it 
was  a  sudden,  wild  growth  among  a  restless  people 
intent  upon  their  own  immediate  affairs  and  care- 
less of  collateral  matters,  conducted  largely  by 
business  men.  We  grew  rapidly,  and  soon  out- 
stripped the  mother  country  in  invention,  new 
ideas  and  in  point  of  magnitude  ;  but  we  grew  un- 
evenly, and  soon  developed  a  number  of  incidental 
and  glaring  abuses,  among  which  were  a  disregard 
of  minor  equities,  extravagance  in  getting  business, 


331 

a  high  lapsing  rate  and  wholesale  forfeiture  of  re- 
serves. Extravagance  was  the  principal  trouble,  as 
it  induced  rebating  and  lapsing,  and  made  it  neces- 
sary to  squeeze  policy-holders  in  order  to  provide 
funds  for  high  first  commissions.  The  disappointed 
American  policy-holder  complained  to  his  legisla- 
ture and  insurance  department,  hence  a  bewildering 
multiplication  of  restrictive  laws  and  supervision  ; 
but  the  companies  themselves  were  responsible, 
and  in  many  cases  the  better  among  them  even 
asked  for  the  laws  in  hopes  of  thus  restraining  the 
more  reckless.  The  non-forfeiture  laws  of  Maine 
and  IN'ew  York  and  most  of  the  anti-rebate  laws 
were  passed  upon  the  initiative  of  the  companies. 
But  something  else  happened.  An  entirely  new 
system  of  insurance  was  brought  forward,  whose 
only  argument  was  a  protest  against  the  extrava- 
gance, forfeitures  and  receiverships  of  the  old  line 
system.  These  fixed  their  limit  of  expenses  by  con- 
tract, left  the  reserves  in  the  pockets  of  policy- 
holders, and  sought  to  avoid  receivers  by  retaining 
the  right  to  assess  over  and  above  original  pre- 
miums. They  did  a  vast  business  until  overtaken 
by  the  inevitable  results  of  erroneous  mathematical 
assumptions  and  exaggerated  representations.  But 
the  abuses  of  the  older  system  were  responsible  for 
their  existence  as  well  as  for  the  multiplied  legisla- 
tion and  supervision.    Mr.  Fackler  informs  us  that 


332 

it  is  because  the  American  people  had  departed 
from  good  old  Anglo-Saxon  liberty-loving  ways. 
If  so,  it  was  because  the  Companies  had  previously 
declined  to  follow  good  old  Anglo-Saxon  precedents, 
and  too  many  of  them  spent  too  much  in  getting 
business,  withheld  premium  notices,  and  tried  to 
gobble  reserves.  These  things  did  not  happen  in 
Great  Britain,  hence  there  was  no  call  for  such  leg- 
ii^lation  and  supervision.  Legislation  is  generally 
empirical.  It  follows  disorder  as  an  expected  cure, 
and  is  but  seldom  intended  as  a  prophylactic. 

Legislation  and  supervision  in  this  country  are 
more  onerous  than  under  a  monarchy  by  reason  of 
our  fundamental  system  of  State  subdivision. 
Therefore,  it  becomes  necessary,  in  contemplating 
the  question  of  Government  interfering  ^^r  se^  to 
bear  in  mind  that  the  drawbacks  of  our  system  of 
States  is  a  purely  local  matter,  which  may  be 
ameliorated  in  time,  and  which  do  not  enter  into 
the  general  discussion  of  such  matters  in  Canada, 
Oreat  Britain,  or  on  the  Continent.  But  the  Ameri- 
can Companies  should  have  thought  of  all  these 
drawbacks  before  they  so  greatly  provoked  them. 
It  is  perhaps  the  penalty  of  a  too  rank  growth. 

I  find  myself  unable  to  concur  in  Mr.  Fackler's 
prescription  for  a  minimum  surrender  value.  It  con- 
tains worse  defects  than  those  of  the  present  Massa- 
chusetts law.     The  surrender  charge  is  a  mere  ques- 


333 

tion  of  damages.  His  first  assumption  is  * '  that 
the  policy-holder  is  under  contract  to  pay  a  certain, 
gross  premium,  the  collection  of  which,  it  is  as- 
sumed, costs  the  Company  nothing  "  ;  and  then  he 
goes  on  to  sketch  out  a  gross  premium  valuation, 
on  a  lo%  mortality  table  at  A%  interest.  These  as- 
sumptions disregard  the  facts  too  obviously  to 
serve  as  a  rational  or  equitable  basis,  and  we  are 
not  suprised  at  the  reductio  ad  dbsurdum^  that 
an  average  whole  life  policy  would,  in  conse- 
quence, be  entitled  to  nothing  "  until  after  elevens 
years." 

It  is  not  true  that  the  collection  of  the  gross, 
premium  costs  the  Company  nothing  ;  from  which 
expense  the  company  is  relieved  by  the  discontin- 
uance. And,  on  the  other  hand,  it  is  true,  on  most 
policies,  that  the  policy-holder  would  be  entitled  to. 
return  dividends  (diminished  by  this  very  cost  oi 
collection)  out  of  this  gross  premium,  all  of  which. 
Mr.  Fackler  conveniently  disregards,  as  it  would 
render  any  form  of  gross  valuation  incompatible. 
Again,  in  the  average  mutual  company,  the  retiring 
policy-holder  has  an  equity  in  the  existing  undi- 
vided surplus  sufficiently  large  not  only  to  take  care 
of  any  temporary  depression  in  the  market  value 
of  assets,  but,  as  some  companies  think,  sufficient 
to  provide  a  reasonable  surrender  charge  and  enable 
them  to  turn  over  the  entire  net  statutory  reserve- 


334 

to  the  policy-holders.  Mr.  Fackler  overlooks  this 
equity  in  surplus,  and  even  hints  at  a  further  sur- 
render charge  for  the  chance  of  depreciated  secur- 
ities. The  assumption  of  a  75%  mortalit}^  for  the 
balance  of  the  life  of  retiring  members  is  altogether 
incongruous,  and  follows  the  error  of  the  late 
Elizur  Wright  in  assuming  a  permanent,  instead  of 
a  temporary,  selection  against  the  company  by 
secession.  As  has  been  several  times  pointed  out 
in  the  Transactions  of  the  American  Society  of  Ac- 
tuaries, the  self  selection  by  withdrawal  is  but  a 
mild  counterpart  of  the  medical  selection  at  entry, 
and  practically  disappears  in  the  retirant  in  about 
five  years  or  less,  leaving  him  thereafter  an  average 
mortality  table  risk.  The  small  deduction  from  net 
reserve  necessary  to  offset  this  temporary  adverse 
selection,  together  with  that  needed  to  offset  a 
small  ^er  capita  increase  in  general  expenses,  I 
have  already  discussed  in  said  Transactions. 

I  would  add  to  my  entire  approval  of  Mr.  Fack- 
ler's  opinion  that  all  non-forfeiture  laws  should 
now  be  abolished,  the  further  recommendation 
that  all  notice  laws  should  likewise  be  repealed. 
Now  that  such  large  surrender  values  are  being 
generally  given,  the  motive  for  enforcing  lapses 
has  also  disappeared.  Notice  laws  are  conflicting 
and  frequently  difficult  to  interpret,  especially 
when  days  of  grace  are  given  in  the  contract. 


335 

These  would  be  much  more  generally  and  gener- 
ously given  if  there  were  no  conflicting  notice 
laws  to  interfere. 


JOHN  B.  LUNGER  : 

At  the  present  time  this  country  is  said  to  be 
on  the  verge  of  an  era  of  prosperity — a  pros- 
perity greater  than  has  ever  been  known  in  its 
history.  Crops  are  abundant,  the  balance  of  trade 
is  in  our  favor,  manufacturing  has  received  great 
impetus,  the  banks  have  more  money  on  deposit 
than  they  know  what  to  do  with,  and  loans  can  be 
effected  in  Kansas  City  and  Denver  at  rates  of  in- 
terest almost  as  low  as  those  which  obtain  in  ]N"ew 
York  City.  All  the  conditions  of  agriculture, 
commerce,  industry  and  finance  are  favorable  to 
prosperity  and  contentment. 

In  about  two  months,  however,  this  extremely 
favorable  condition  of  affairs  will  be  pervaded  by 
a  spirit  of  unrest,  somewhat  akin  to  the  sensations 
felt  before  a  storm.  Will  this  unrest  be  due  to 
some  peculiar  atmospheric  condition  ;  will  there 
be  some  subtle  poison  floating  in  the  air  ;  will  there 
be  danger  of  foreign  complications  ?  No,  none  of 
these.  Congress  and  the  various  State  Legislatures 
will  shortly  convene,  and  no  man  can  tell  to  what 


336 

extent  his  interests  will  be  affected  by  their  pro- 
ceedings. Am  I  exaggerating  the  prospect  ?  I  do* 
not  think  so.  In  truth,  I  am  of  the  opinion  that 
my  forecast  is  very  mild. 

The  value  of  legislation  is  in  direct  proportion  to- 
the  benefits  which  it  confers.  If  laws  are  dictated 
by  high-minded  and  sincere  motives,  and  with  due- 
regard  to  the  principles  of  legislation,  they  will 
contribute  to  the  sum  of  human  happiness  and  to 
the  betterment  of  our  institutions.  If  dictated  by 
ignorance  or  selfishness,  and  in  opposition  to  the 
spirit  of  honest  government,  they  will  degrade 
legislation,  encourage  discontent  and  become  a 
blight  upon  prosperity.  We  cannot  conceal  the 
truth  that  this  country  and  every  community  with- 
in its  borders  is  suffering  from  too  much  legislation 
of  the  kind  that  calls  for  earnest  protest.  Some 
day  the  great  safeguard  of  the  nation,  the  common- 
sense  of  the  people,  will  prevail  and  ''something^ 
will  drop,"  and  with  such  a  noise  that  its  echoes 
will  be  heard  for  many  years.  What  we  need  to  in- 
sure a  long  era  of  prosperity  is  not  bigger  crops,, 
greater  output  and  more  confidence,  but  less  legis- 
lation. 

But  what  have  these  things  to  do  with  legislation 
in  life  insurance  ?  Just  this.  As  the  part  partakes 
of  the  nature  of  the  whole,  so  legislation  in  matters- 
of  life  insurance  is  not  one  whit  dissimilar  to  the- 


337 

general  tendency  of  law  making,  all  that  has  been 
necessary  in  recent  years  to  get  through  any  sort 
of  ignorant  or  vicious  legislation  on  matters  of 
life  insurance,  has  been  to  label  it  '' Fraternal. '^ 
This  mystic  word  of  brotherhood  has  served  as  a 
cloak  for  rascality  and  deception  for  nearly  a  quarter 
of  a  century,  until  now  the  true  nature  of  the 
schemes  fostered  in  its  name  are  being  made  clear, 
not  by  correcting  legislation,  but  by  the  inevitable 
laws  of  nature.  Take  into  the  legislative  chamber  a 
bill  labeled  "  Fraternal,"  and  forthwith  it  is  favor- 
ably considered  in  committee  and  rushed  to  a  vote 
despite,  may  be,  the  protest  of  the  person  whose 
duty  it  is  to  supervise  the  interests  affected  by  the 
bill,  and  the  unfavorable  opinions  of  those  who, 
by  reason  of  long  experience,  are  competent  to 
judge  of  its  merits  and  good  intent.  The  bill  on 
its  face  has  the  appearance  of  being  for  ''  the  good 
of  the  people,"  and  a  vote  in  its  favor  may  help  to 
secure  a  renomination.  Judgment  and  know^ledge 
are  of  small  moment  to  the  legislator  who  is  bent 
on  posing  before  his  constituents. 

On  the  other  hand,  present  to  a  legislative  body 
a  bill  labeled  "  Regular."  It  is  promptly  referred 
to  a  committee,  before  whom  in  due  course  of  time, 
those  who  favor  the  bill,  and  those  who  oppose  it 
present  their  respective  arguments.  The  Commis- 
sioner is  then  invited  to  express  his  opinion,  and 


338 

after  this  pleasing  formality  the  bill  is  generally- 
tabled.  It  comes  from  an  old-line  company  and 
therefore  mnst  be  the  outcropping  of  iniquity. 
Legislatures  are  too  prone  to  look  upon  life  insur- 
ance companies  as  antagonistic  to  the  welfare  of 
the  people.  They  do  not  seem  to  realize  how  de- 
pendent the  public  is  upon  life  insurance  for  the 
protection  of  home  or  self.  It  is  safe  to  say  that 
not  one  man  in  ten  would  leave  any  provision 
^whatever  to  his  family  or  be  prepared  to  buffet 
with  old  age,  were  it  not  for  life  insurance,  and 
yet  this  business  is  made  the  subject  of  attack  and 
of  misconception  in  legislative  chambers,  and  those 
who  are  prudent  enough  to  avail  themselves  of  its 
benefits  are  heavily  taxed — for  after  all,  the  tax  on 
premiums  comes  out  of  the  pockets  of  the  insured. 
If  all  the  life  insurance  companies  doing  business  in 
a  certain  State  were  compelled  to  withdraw  from  that 
"State  by  unwise  legislation,  those  who  had  brought 
about  this  result  would  probably  have  such  a  storm 
raised  about  their  ears  that  it  would  bring  home 
very  forcibly  the  intimate  connection  between  the 
welfare  of  the  public  and  life  insurance,  even  if  it 
is  not  labeled  "  Fraternal." 

I  must  emphatically  agree  with  Mr.  Fackler  that 
legislation  is  inimical  to  the  interests  of  life  in- 
surance, even  if  dictated  by  the  best  of  intentions 
and  from  the  most  sincere  motives.   Life  insurance 


339 

is  a  business  of  a  technical  nature  and  cannot  be 
analyzed  by  men  who  are  not  familiar  with  its 
principles.  Moreover,  as  Mr.  Fackler  so  pertinent- 
ly points  out,  the  conditions  of  the  business  are  so 
changeable  that  legislation  which  would  be  of 
value  to-day  might  in  ten  years  become  a  menace. 
No  ! — keep  legislation  away  from  the  business. 
It  only  results  in  bringing  in  timidity  where  posi- 
tiveness  should  exist,  and  in  discouraging  conces- 
sions that  would  otherwise  be  made.  Competition, 
and  the  wisely  directed  desire  to  increase  the  use- 
fulness of  the  business,  have  done  more  to  bring 
about  liberality,  fair  play  and  safety  than  all  the 
laws  that  have  ever  been  enacted. 

But,  suppose  that  there  must  be  legislation, 
what  then  ?  Simply  this,  that  it  should  be  limited 
to  the  conditions  upon  which  a  company  may  be- 
gin business,  and  to  defining  standards  of  safety. 

The  benefits  to  be  given  for  premiums  paid  and 
other  details  of  practice  would  better  be  left  to 
the  companies.  If  this  cannot  be  done,  and  we 
must  have  legislation,  then  the  laws  enacted  should 
be  more  for  the  purpose  of  indicating  the  sense  of 
the  legislative  body,  than  of  defining  amounts.  To 
make  a  direct  application  of  this  statement,  any 
law  passed  with  regard  to  surrender  values  should 
define  a  minimum,  not  a  maximum  benefit.  The 
dangers  of  maximum  legislation  are  illustrated  in 


340 

the  Massachusetts  Non-forfeiture  law.  No  ona 
can  question  the  sincerity  of  the  man  who  drafted, 
this  bill.  He  was  a  great  authority  in  his  day  and 
stood  high  in  public  and  private  esteem,  but  he 
was  inclined  more  toward  theory  than  practice, 
with  the  result  that  he  committed  the  mistake  of 
basing  the  proposed  benefits  of  the  law  upon  an 
involved  formula.  The  outcome  of  his  efforts  was 
a  *'  Chinese  puzzle,"  as  I  have  heard  it  called  by 
a  former  State  official,  the  scientific  accuracy  and 
the  common  sense  whereof  no  manager  or  actuary, 
with  one  exception,  has  ever  been  able  to  discover^ 
— and  this  one  exception  is  no  doubt  influenced  in 
his  opinions  by  considerations  of  filial  respect. 
The  practical  result  of  this  example  of  maximum 
legislation  has  been  to  dwarf  the  Massachusetts, 
companies  and  to  serve  as  a  constant  menace  to 
them.  To  what  extent  their  usefulness  would 
have  been  increased  if  the  Massachusetts  Non-for- 
feiture law  had  never  been  enacted,  can  best  be 
judged  by  a  comparison  of  their  records  with  those 
of  companies  of  equal  age  in  other  States. 

The  New  York  State  Non-forfeiture  law,  on  the 
other  hand,  is  a  wise  example  of  minimum  legis- 
lation. It  defines  that  in  the  sense  of  the  Legisla- 
ture surrender  values  in  life  insurance  should  be 
allowed,  but  the  amounts  called  for,  even  at  the- 
time  the  bill  was  passed,  were  lower  in  the  main 


341 

than  the  values  then  being  granted  by  the  compan- 
ies. It  stands  upon  the  statute  books  to-day,  not  as 
an  index  to  surrender  values,  but  as  an  admonition 
that  they  should  be  granted.  Scientifically,  the 
bill  is  not  accurate,  but  better  than  that,  it  gives 
play  to  changing  conditions  and  common  sense. 

The  difficulties  which  legislators  would  en- 
counter, if  they  attempted  to  define  proper  sur- 
render values  may  be  gathered  from  the  discus- 
sions which  take  place  in  this  country  and  abroad 
regarding  surrender  charges  and  surrender  values. 
There  are  no  two  features  of  life  insurance  which 
are  being  debated  at  greater  length,  and  it  would 
probably  be  difficult  to  bring  together  two  men  on 
this  side  of  the  water  or  abroad  whose  views  upon 
either  subject  would  harmonize.  Until  there  is 
greater  unanimity  on  these  points  among  the 
experts,  it  would  seem  wise  for  legislators  not  to 
intermeddle,  especially  as  the  tendency  of  the  com- 
panies to  put  forth  policies  on  attractive  lines  has 
led  to  a  competition  in  this  respect  which  has 
produced  benefits  which  are  more  than  liberal,  and 
which  in  themselves  indicate  that  there  is  no  neces- 
sity for  legislation.  One  of  the  maxims  in  life 
insurance  to-day  is,  ''  Give  the  policy-holder  every 
dollar  of  equity  to  which  he  is  entitled,"  and  the 
sentiment  is  fittingly  observed  in  the  voluntary 
granting  of  surrender  values. 


342 

S.  H.  WOLFE  : 

The  action  on  the  part  of  the  legislature  of 
several  of  the  States  in  enacting  laws  for  the  pur- 
pose of  placing  assessment  associations  upon  a 
firmer  basis,  and  bringing  them  one  step  nearer  to 
that  condition  of  affairs  which  must  eventually 
cause  all  distinctions  to  disappear,  lends  peculiar 
interest  and  importance  at  this  time  to  a  discussion 
as  to  the  right  of  the  State  to  compel  insurance 
companies  to  give  a  cash  surrender  value  to  policy- 
holders withdrawing  from  the  company. 

Mr.  Fackler's  paper,  it  seems  to  me,  while  trac- 
ing out  clearly  the  Aryan  wave  which  swept  over 
the  continent  of  Europe,  and  the  consequent  rise 
and  fall  of  the  various  races  and  forms  of  govern- 
ment, has  omitted  a  statement  of  the  legal  status 
of  the  reserve  of  a  company  ;  for  after  all,  the  dis- 
cussion simmers  down  to  the  question  whether  this 
reserve  is  the  property  of  the  insured  or  of  the 
company,  and  whether  in  the  event  of  his  with- 
drawal he  is  entitled  to  receive  the  full  amount,  or 
a  percentage  of  the  same.  To  this  aspect  of  the 
question  I  will  therefore  confine  myself. 

While  it  is  an  indisputable  fact  that  the  happi- 
ness of  the  citizen  is  best  served  in  those  countries 
in  which  paternalism  is  not  rampant,  and  in  which 
the  intelligence  and  discrimination  of  the  citizen  is 


343 

encouraged  by  the  absence  of  restrictive  laws,  still, 
to  anyone  who  has  watched  the  epidemic  of  "  wild 
cat"  corporations  from  which  this  country  has 
suffered  during  the  past  two  decades,  the  abolition 
of  all  supervision  and  legislation  pertaining  to  in- 
surance matters  is  a  subject  of  great  magnitude. 

Mr.  Fackler  himself  has  referred  to  these  "  codu- 
perative"  concerns  which  have  been  allowed  to 
exist  in  the  various  States  and  absorb  the  savings  of 
the  poorer  class,  for  it  is  a  regrettable  fact  that  it  is 
to  these  individuals  to  which  the  agents  or  organ- 
izers can  most  successfully  appeal,  and  yet  the 
blame  for  their  existence  rests  not  in  State  super- 
vision, but  in  the  way  that  the  supervising  officers 
are  hampered  and  tied  by  the  lack  of  authority 
granted  to  them  by  legislatures.  Instead  of  sur- 
rounding assessment  and  fraternal  insurance  with 
safeguards  as  stringent  as  those  to  which  legal  re- 
serve companies  are  required  to  conform,  it  is  ap- 
parent that  irresponsible  concerns  have  been  al- 
lowed to  flourish  and  multiply  like  noxious  weeds^ 
only  to  go  into  the  hands  of  receivers,  leaving  thou- 
sands of  bewailing  victims. 

It  is  necessary,  therefore,  that  the  police  laws, 
for  I  so  term  the  laws  regulating  insurance  corpor- 
ations, be  enforced,  and  should  there  be  found  a 
necessity  for  any  change  in  them,  I  sincerely  hope 
that  it  will  be  in  the  direction  of  more  stringent 


344' 

rather  than  more  lenient  ones.  This  statement 
brings  us  face  to  face  with  the  specific  question 
under  discussion,  viz. :  the  necessity  for  a  law  re- 
quiring a  surrender  value. 

Mr.  Fackler  presents  two  propositions  :  First, 
that  there  is  no  necessity  for  such  a  law,  because 
the  competition  which  always  exists  between  com- 
panies will  require  them  to  treat  their  policy-hold- 
ers liberally ;  and  secondly,  that  the  enforcement 
of  such  a  law  will  work  injuriously  to  the  interests 
of  the  policy-holders,  inasmuch  as  corporations 
will  avail  themselves  of  the  privilege  granted  by  it 
and  will  give  to  the  policy-holders  only  the  mini- 
mum provided  therein,  instead  of  a  larger  amount 
w^hich  they  could  afford,  and  which  competition 
would  dictate  that  they  should  give.  It  seems  to 
me  that  there  is  a  slight  contradiction  here,  for 
the  competition  which  exists  before  the  pas- 
sage of  a  law  exists  in  the  same  degree  after 
its  enactment,  and  the  truth  of  this  proposition  is 
evidenced  by  the  fact  that  the  surrender  values 
now  granted  by  insurance  companies  are  not  the 
ones  which  are  provided  by  the  laws  of  the  State  of 
New  York,  but  are  the  direct  results  of  competi- 
tion between  the  companies.  Nor  is  it  a  sound 
proposition  that  Mr.  Fackler  advances  that  the 
State  should  leave  to  the  companies  the  regulation 
^f  these  values,   for    Mr.     Fackler    himself    has 


345 

pointed  out  in  his  paper  that  the  officers  of  com- 
panies are  not  the  best  judges  and  frequently  give 
more  than  they  can  afford. 

While  it  is  true  that  insurance  companies  were 
brought  into  existence  for  the  purpose  of  paying 
death  claims  and  distributing  the  individual  losses 
over  a  large  area,  it  is  likewise  true  that  the  insti- 
tution as  administered  to-day  has  assumed  largely 
the  functions  of  a  banking  corporation.  I  say  this 
advisedly,  for  it  is  a  bold  proposition  to  make, 
but  I  can  see  no  distinction  between  the  operations 
of  an  insurance  company  accumulating  reserves  for 
the  maintenance  of  a  level  premium,  and  the  opera- 
tions of  a  savings  bank,  which  allows  interest  on 
annual  deposits,  and  permits  the  withdrawal  of 
annual  increments. 

It  may  not  be  amiss  to  emphasize  this  statement 
by  an  exhibit  of  the  simplest  and  most  elementary 
method  of  determining  the  reserve  on  any  policy, 
and  one  which  Mr.  Fackler  has  used  with  such 
happy  results  in  his  accumulation  formula. 

Assuming  that  1  represents  the  number  living  at 
any  agex,  d  the  number  dying  at  the  same  age,  p 
the  net  annual  premium  for  any  form  of  insurance 
for  one  dollar,  H  the  reserve  at  the  end  of  the  pre- 
vious policy  year,  and  (i  +  i)  the  amount  of  one 
dollar  at  i  rate  of  interest  for  one  year,  it  will  be 
apparent  that 


346 
(I  +  i)  1.  (H  +  p)-d, 

Ix  +  I 

will  represent  the  reserve  accumulation  at  the  end 
of  the  year  for  an  insurance  of  one  dollar  ;  in  other 
words,  the  excess  payment  which  has  been  given 
to  the  company  for  the  purpose  of  accumulation 
in  order  that  the  insured  will  not  be  required  to 
pay  premiums  advancing  in  accordance  with  his 
age. 

Is  this  excess  payment  a  whit  less  sacred  than 
that  portion  of  the  premium  which  has  been  paid 
to  cover  the  current  mortality  costs  ?  Is  the  in- 
sured's title  to  this  excess  payment  less  clear  and 
distinct  than  his  title  to  the  mortuary  benefits, 
and  finally,  to  what  extent  does  he  impair  this 
title  by  withdrawing  from  the  company  and  refus- 
ing to  further  continue  his  premium  payments  ? 
Is  it  not  true  that  the  contract  entered  into  be- 
tween the  insured  and  the  company  is  of  a  dual 
nature,  the  failure  to  complete  one  part  of  which 
leaves  the  other  intact  ? 

Mr.  Justice  Bradley  in  a  decision  handed  down 
by  the  United  States  Supreme  Court  in  the  case  of 
New  York  Life  Insurance  Company  versus  Statham 
(93  U.  S.  Rep.),  held  that  a  policy  accumulating 
a  reserve  was  not  a  contract  renewable  from  year 
to  year,  and  therefore  the  policy-holder,  in  the 
event  of  a  failure  to  pay  his  premiums,  still  re- 


347 

tained  an  equity  in  the  reserve  held  in  the  hands  of 
the  company.     The  exact  words  of  his  decision  are  : 

''Indeed  the  company,  if  well  managed,  has 
laid  aside  and  invested  a  reserve  fund  equal  to 
this  equitable  value,  to  be  appropriated  to  the 
payment  of  his  policy  when  it  falls  due.  This  re- 
serve fund  has  grown  out  of  the  premiums  already 
paid.  It  belongs,  in  one  sense,  to  the  insured  who 
has  paid  them,  somewhat  as  a  deposit  in  a  savings 
bank  is  said  to  belong  to  the  person  who  made  the 
deposit.  Indeed,  some  life  insurance  companies 
have  a  standing  regulation  by  which  they  agree  to 
pay  any  person  insured,  the  equitable  value  of  his 
policy  whenever  he  wishes  it.  In  other  words  it  is 
due  on  demand.  But  whether  thus  demandable  or 
not,  the  policy  has  a  real  value  corresponding  to 
it, — a  value  on  which  the  holder  often  realizes 
money  by  borrowing.  ^  ^  -^  ^  To  forfeit  this 
excess,  which  fairly  belongs  to  the  assured,  and  is 
fairly  due  from  the  company,  and  which  the  latter 
actually  has  in  its  coffers,  and  to  do  this  for  a 
cause  beyond  individual  control,  would  be  rank 
injustice.  It  would  be  taking  away  from  the  as- 
sured that  which  had  already  become  substanti- 
ally his  property." 

While  it  is  true  that  this  is  the  case  of  a  policy- 
holder who  has  been  prevented  by  act  of  war  from 
completing  his  share  of  the  contract,  the  case  of  a 


348 

policy-holder  who  voluntarily  decides  to  discon- 
tinue these  payments  differs  but  slightly  when 
the  question  of  the  ownership  of  the  individual  re- 
serve is  considered. 

Mr.  Fackler  has  suggested  a  general  rule  suitable 
for  adoption  as  a  law  which  is  to  apply  to  the 
•case  of  withdrawing  members,  and  for  the  sake  of 
<5omparison  I  have  compiled  a  table  which  exhibits 
the  condition  of  the  excess  payment  fund  made  by 
the  insured  year  by  year.  These  excess  payments 
are  ones  for  which  he  has  received  no  benefit,  and 
for  which  the  company  has  made  no  expenditures. 
Besides  these  payments  I  have  placed  the  cash 
values  which  would  be  given  under  the  proposed 
law  of  Mr.  Fackler  computed  (as  were  the  figures 
in  the  first  column),  upon  the  basis  of  the  Actuar- 
ies Table  of  Mortality,  with  four  per  cent  interest. 


Year  of 

Excess 

Proposed 

Insurance. 

Payments. 

Values. 

Percentage. 

1 

$11.48 

0 

0 

2 

23.34 

0 

0 

3 

35.59 

0 

0 

4 

48  25 

0 

0 

5 

61.34 

0 

0 

6 

74.86 

0 

0 

7 

88.84 

0 

0 

8 

103.29 

0 

0 

9 

118.16 

0 

0 

10 

133.41 

0 

0 

15 

214.30 

$27.47 

12+ 

20 

301.35 

179.59 

69+ 

349 

It  seems  to  me  that  this  is  too  severe  a  penalty 
to  require  of  the  insured,  for  after  all,  is  the  de-^ 
sire  upon  his  part  to  withdraw  from  the  company 
a  premeditated  act  of  discrimination,  or  is  it  rather 
the  result  of  circumstances  which  prevents  the 
payment  of  the  premiums  ?  The  benefits  of  life 
insurance  have  been  pointed  out  in  such  alluring^ 
terms  by  an  energetic  corps  of  agents  that  there 
exists  to-day  but  few  people  who  are  not  convinced 
of  the  absolute  necessity  for  the  protection  of 
the  family  after  the  decease  of  the  wage- earner. 

Bearing  this  proposition  in  mind,  and  disregard- 
ing those  whose  insurances  have  become  unneces- 
sary owing  to  the  absence  of  anyone  enjoying  an 
insurable  interest,  the  withdrawing  members  of 
any  insurance  company  may  be  divided  into  two 
classes :  (a)  Those  whose  financial  condition  does, 
not  permit  of  their  continuing  the  policies ;  and 
(b)  Those  who  have  been  convinced  by  some  rival 
agent  that  they  can  get  better  goods  for  their 
money  in  some  other  company.  It  is  fair  to  as- 
sume that  the  majority  of  those  belonging  to  tha 
latter  class  will  before  allowing  their  policies  to 
lapse,  assure  themselves  through  the  medium  of  a 
medical  examination  that  they  are  in  an  incurable 
condition,  and  therefore  likely  of  acceptance  in 
the  new  company. 

Succinctly  stated,  then,  the  withdrawing  mem- 


350 

bers  are  either  poor  or  dissatisfied.  The  question 
now  arises  as  to  the  damage  inflicted  upon  the 
persistent  members,  for  it  is  this  damage  which 
must  be  assessed  as  a  surrender  charge. 

The  physical  condition  resulting  from  a  scarcity 
of  funds,  and  the  mental  condition  resulting  from 
financial  worries  are  notorious  factors  in  the  short- 
ening of  life.  The  danger  from  suicide  is  enhanced, 
the  tendency  towards  indulgence  in  intoxicants 
and  narcotics,  with  the  subsequent  failure  to 
obtain  proper  nourishment,  the  fact  that  a  person 
in  this  condition  is  less  obnoxious  to  many  diseases, 
all  render  this  class  of  insurants  less  desirable 
than  the  normal  policy-holders.  It  is  clear,  then, 
that  the  company  will  lose  nothing  from  this 
class  of  withdrawals. 

The  second  class,  however,  presents  a  different 
aspect,  and  the  proposition  here  quickly  resolves 
itself  into  the  question  of  the  ability  of  the  com- 
pany to  overcome  the  dissatisfaction  by  placing 
upon  the  withdrawers  a  punishment  so  heavy  as  to 
be  prohibitive. 

I  have  shown,  however,  that  this  class  of  with- 
drawing members  is  in  good  physical  condition, 
and  the  question  of  the  damage  done  becomes 
more  vital.  A  pertinent  inquiry  at  this  moment 
is  whether  the  premium  charged  by  the  company 
is  based  upon  statistics  which  considered  the  nor- 


351 

mal  life  only,  or  whether  the  very  fact  of  with- 
drawal has  not  been  taken  into  consideration  in  the 
composition  of  the  premium. 

The  two  tables  of  experience  upon  which  com- 
panies in  the  United  States  are  operating  are  the 
Actuaries'  or  Combined  Experience  Table,  and  the 
American  Experience  Table.  The  former  was  com- 
piled by  a  committee  of  actuaries  from  the  experi- 
ence of  seventeen  English  life  insurance  offices, 
which  exhibited  a  record  of  62,537  assurants.  This 
was  arranged  for  publication  and  graduated  under 
the  supervision  of  the  eminent  English  actuary,  Mr. 
Jenkin  Jones,  of  the  National  Mercantile  Life 
Assurance  Society.  The  second  table  (the  Ameri- 
can Experience)  shows  the  experience  of  the 
Mutual  Life  Insurance  Company  as  observed  upon 
68,000  lives,  and  graduated  by  Mr.  Sheppard 
Homans. 

It  is  fair  to  assume,  then,  I  think,  that  all  of 
these  contributing  offices  passed  through  the  ex- 
perience of  having  members  retire,  and  therefore, 
any  adverse  effect  upon  the  mortality  has  found  its 
corresponding  reaction  in  the  charges  made. 

Is  a  life  insurance  company  ever  exposed  to  the 
danger  to  which  banks  are  subject,  viz.  :  having 
a  "  run  "  made  upon  it  ?  The  policy-holders  in  an 
insurance  company  bear  a  different  relation  to  the 
company  than  do  the  depositors  to  a  bank.     To  a 


352 

certain  extent  it  is  true  that  the  average  man 
thinks  only  of  his  insurance  when  the  anniversary 
of  the  due  date  of  his  premium  payment  is  at 
hand,  and  between  those  dates  the  policy  lies  un- 
read and  unthought  of  in  the  safe.  Numerous- 
companies,  many  of  them  to-day  among  the  sound- 
est financial  institutions  of  the  land,  have  passed 
through  crises  which  threatened  to  undermine 
them.  Subject  to  the  attacks  of  the  insurance  and 
the  daily  press,  exposed  to  the  adverse  returns  of 
insurance  officials,  they  have  nevertheless  moved 
on  without  experiencing  severe  '  *  runs. ' '  This  con- 
dition of  affairs  is  explainable  only  on  the  ground 
that  the  due  dates  do  not  frequently  recur,  in  con- 
tra-distinction  to  the  deposits  in  a  bank,  which  are 
always  subject  to  payment. 

It  is  an  axiom  of  the  law,  I  believe,  that  the 
extent  of  the  damage  must  be  proven  before 
restitution  can  be  demanded,  and  I  am  of  the 
opinion  that  an  attempt  to  assess  the  damages 
caused  by  withdrawing  members  will  result  in 
the  development  of  the  fact  that  the  company 
benefits  to  a  certain  extent  by  each  exit.  This  is 
certainly  true  in  those  companies  whose  members 
are  permitted  to  participate  in  the  profits  of  the 
business,  for  a  certain  portion  of  the  surplus 
earned  by  the  insured  (the  amount  of  which 
depends  upon  the  nature  of  the  contract,  whether 


353 

tontine  or  annual  distribution),  remains  in  the 
hands  of  the  company.  One  corporation  that  I 
have  in  mind  has  gone  so  far  as  to  assume  that  the 
"mortality  damage"  is  counter-balanced  by  the 
forfeited  share  of  the  surplus,  and  in  consequence 
the  insured  is  given  the  entire  reserve  on  the 
policy. 

Inasmuch  as  I  have  disagreed  with  Mr.  Fackler's 
recommendation,  it  is  but  just  that  I  should 
suggest  a  substitute,  which  to  my  mind  would  do 
ample  justice  to  the  insured  and  to  the  companies. 
The  proper  field  of  investigation  lies  in  a  decreas- 
ing scale  of  assessed  damages  proportionate  to  the 
initial  expense  for  obtaining  the  business.  As 
soliciting  methods  are  constituted  to-day  a  com- 
pany requires  from  one  to  five  years  to  recover 
from  the  shock  caused  by  the  injection  of  new 
business,  and  until  a  policy  has  entirely  repaid  into 
the  surplus  fund  all  that  was  extracted  for  its 
procurance,  it  should  not  be  allowed  a  surrender 
value.  At  the  end  of  that  time  a  deduction  should 
be  made,  not  as  Massachusetts  has  done,  by  a 
uniform  surrender  charge,  but  by  one  extending 
over  a  period  of,  say  five  years,  corresponding  to 
the  effects  which  medical  selection  will  have  upon 
the  mortality  of  the  company.  This  is  the  sugges- 
tion which  I  would  make,  leaving  its  working 
details  to  those  who  would  have  in  their  possession 


354 

the  experience  of  all  the  companies  as  a  working 
basis. 

In  conclusion  I  would  say  that  I  disagree  with 
Mr.  Fackler  in  regard  to  the  hopelessness  of  all 
legislation  owing  to  the  failure  of  Massachusetts 
in  that  direction .  The  memory  of  Elizur  Wright 
is  held  dear  by  all  who  recognize  that  his  steps 
marked  the  initial  reform  in  life  insurance  super- 
vision, and  the  lesson  learned  therefrom  is  not  that 
we  should  sit  idly  by  with  folded  arms  and  deplore 
the  failure  of  his  laws,  but  rather  that  we  should 
bestir  ourselves  in  an  attempt  to  obtain  better,  more 
exact,  and  more  scientific  ones,  a  condition  of 
affairs  which  I  am  sure  will  prove  more  satisfac- 
tory to  the  companies  and  to  the  departments. 


ASSESSMENT   LIFE  INSURANCE. 

ITS   BEGINNING,    DEVELOPMENT,   AND    FUTURE. 
GEORGE  DYRE  ELDRIDGE  : 

NO  claim  of  failure  in  attaining  permanence  will 
justify  negligence  on  the  part  of  the  student 
of  life  insurance  of  the  movement  that  found  em- 
bodiment in  the  assessment  system,  so  called.  He 
who  assumes  to  speak  for  it  to-day  may  essay  an 
unpopular  role — but  a  movement  which  succeeded 
in  a  brief  quarter  of  a  century  in  the  collection 
from  its  adherents,  and  in  the  distribution  to 
widows  and  orphans,  of  nearly  one  billion  dol- 
lars, has  a  meaning  capable  of  exerting  a  strong 
influence  on  the  future  of  American  Life  Insur- 
ance. 

Assessment  life  insurance  had  its  unobtrusive 
beginning  thirty  years  ago.  The  oldest  active 
American  life  insurance  company  was  less  than  a 
quarter  of  a  century  in  business  ;  the  insurance  in 


356 

force  was  less  than  $1,200,000,000  ;  the  assets  of 
all  the  companies  scarce  exceeded  $175,000,000. 
American  industrial  life  insurance  was  un- 
thought  of  ;  the  man  whose  genius  for  hard  work 
and  successful  organization  opened  the  road  to  its 
success  had  scarce  passed  his  majority  ;  the  degree 
to  which  the  insurance  instinct  would  develop  in 
t}ie  American  people  was  unguessed.  Of  the 
forces  that  appealed  to  that  instinct ;  of  the  forces 
that  have  made  the  American  people  of  all  people 
on  earth  an  insuring  nation,  not  the  least  effective 
was  the  assessment  movement. 

We  are  often  told  that  the  movement  grew  big 
upon  the  wish  of  the  masses  to  get  *'  something  for 
nothing."  It  certainly  grew  big  upon  the  wish  to 
secure  something — and  that  something  was  the 
benefit  which  life  insurance  alone  can  give — the 
protection  of  wife,  children  and  dependents  which, 
when  life  insurance  is  stripped  of  all  the  ex- 
traneous growths  which  have  encompassed  it,  still 
is  and  still  must  be  its  primary  and  central  pur- 
pose. It  grew  in  mass  side  by  side  with  industrial 
life  insurance — that  retail  development  which  is 
necessarily  the  most  costly  of  all.  A  people  which 
grasped  as  readily  and  impartially  as  did  our 
people  these  two  opposing  schemes,  directed,  how- 
ever, to  one  central  purpose,  is  not  a  people  simply 
crazy  for  value  without  equivalent  yielded.     It  is 


857 

far  more  apt  to  be  the  verdict  of  the  future  that 
the  managers  of  assessment  institutions  falsely 
attributed  their  marvelous  growth  to  the  mere 
claim  of  cheapness,  and  in  the  pursuit  of  false 
gods  sacrificed  the  opportunity  which  was  no  less 
theirs  than  it  was  that  of  their  competitors. 

In  its  origin  there  was  complete  failure  to  recog- 
nize the  fact  that  life  insurance  was  the  end  and 
purpose  of  the  assessment  movement.  In  large 
part  this  was  due  to  the  ignorance  of  the  general 
public  as  to  the  nature  of  real  life  insurance  : 
that  it  is  simply  a  method  or  system  of  distribut- 
ing over  an  entire  community  the  money  loss  due 
to  the  death  of  the  one.  The  movement  aimed,  by 
what  seemed  the  simplest  and  most  direct  method, 
to  secure  some  certainty  for  the  future  to  the  de- 
pendents of  a  dead  neighbor  or  fellow- workman, 
and  it  came  into  being,  not  as  the  result  of  any 
organized  concert  of  action,  but  simply  in  response 
to  one  of  those  common  movements,  having  no 
recognized  centre,  but  many  apparent  centres, 
which  at  times  affect  the  public.  Already  life 
insurance,  as  it  presented  itself  to  the  average 
man,  had  become  a  most  complex  organization, 
seemingly  calling  for  the  payment  of  much  unnec- 
essary money  ;  seemingly,  involving  much  unprofit- 
able expense ;  seemingly,  demanding  much  unre- 
munerative  accumulation.     There  was  nothing  in 


358 

all  this  to  teach  him  that  all  this  machinery  had  as 
its  simple  aim  a  simple  end,  and  that  when  he 
formed  his  burial  club,  his  benefit  society,  or  took 
membership  in  his  "  order,"  he  was  entering  upon 
this  great  business  of  life  insurance  and  address- 
ing to  an  end  already  attainable  varied  methods, 
which  would  succeed  or  fail  in  the  degree  to  which 
they  conformed  themselves  to  the  requirements  of 
practical  business  and  the  inviolable  laws  which 
underlie  all  transactions  which  have  to  do  with  the 
decrement  of  human  life  through  mortality.  On 
the  other  hand  many  men  believed  the  new  move- 
ment wrong,  simply  because  others  said  so  ;  others 
felt  that  it  was  wrong  with  an  instinct  that  baffled 
analysis  ;  and  the  few  who  knew  its  weakness 
failed  to  make  that  knowledge  clear  to  the  many 
to  whom  that  movement  appealed.  The  result  was 
that  the  assault  was  made  with  weapons  often 
weaker  than  the  error  assailed,  and  failure  was 
predicted  on  grounds  that  as  directly  assailed  ex- 
isting methods  as  those  which  were  sought  as 
substitutes. 

For  it  was  not  the  distribution  of  cost  after  the 
occurrence  of  the  event ;  it  was  not  the  treatment 
of  the  individual  in  his  personal  relation  to  an  in- 
creasing weight  of  risk  that  was  at  fault.  If  it 
had  been  both  or  either,  then  all  life  insurance 
were  impossible,  for  these  are  features  inherent  to 


359 

every  system.  The  one  great  weakness  was  failure 
to  provide  security  for  the  payment  of  cost — fail- 
ure to  take  ordinary  business  precautions  against 
the  granting  of  credit  without  security. 

I  name  this  as  the  great  weakness,  for  however 
fallacious  was  the  idea  as  to  cost  distribution  which 
originally  prevailed,  it  was  bound  to  correct  itself 
with  little  damage  to  the  body  of  members  had 
there  existed  security  that  assured  the  collection  of 
cost  and  protected  the  mass  of  members  against 
loss  by  non-payment  on  the  part  of  any  portion. 
The  rules  of  proper  cost  distribution  won  much 
earlier  recognition  than  is  generally  admitted,  but 
when  such  recognition  came  there  had  already 
come  the  pressing  problem  of  insufficient  security 
which  overtopped  by  its  ceaseless  demands  every 
other  requirement. 

One  is  not  compelled  to  trust  to  tradition  or  ar- 
bitrary reminiscence  to  determine  the  accuracy  of 
this  statement.  There  is  the  published  record 
available,  as  in  almost  no  other  branch  of  insur- 
ance. In  the  reports  of  the  National  Convention 
one  may  read  the  history  of  the  broadening  of 
thought,  measure  the  growing  grasp  of  the  ques- 
tions that  pressed  upon  the  managers  of  companies, 
and  gauge  the  relative  importance  attached  to 
these  questions.  You  will  find  that  these  men 
early  recognized  that  there  is  but  one  standard  for 


360 

the  distribution  of  cost;  you  will  find  that  years 
ago  they  knew  that  proper  distribution  demanded 
the  recognition  of  the  factor  of  attained  age,  and 
that  the  great  question  they  were  struggling  with 
was  the  question — how  ? 

An  easy  question  to  answer,  the  actuary  and 
the  commissioner,  perhaps,  unite  in  declaring  ;  for 
no  inconsiderable  share  of  the  contracts  were  so 
framed  as  to  make  proper  adjustment  legally  pos- 
sible, and  the  way  to  adjust  is  to  adjust.  But  there 
ever  stood  in  the  way  that  terrible  lion  of  insecur- 
ity— insecurity,  not  inherent  to  the  method  of  post- 
mortem adjustment,  but  born  of  post-mortem  col- 
lection, of  cost,  and  fostered  by  the  laws  of  our 
several  States.  The  future  historian  of  the  assess- 
ment movement,  when  the  acrimony  born  of  per- 
sonal competition  has  ceased  to  distort  the  vision, 
will  be  forced  to  recognize  and  give  weight  to  the 
influence  which  law  has  had  in  shaping  the  future 
of  the  associations  and  in  barring  the  way  to  the 
corrections  of  the  weaknesses  of  earlier  methods. 
Even  that  degree  of  accumulation  which  would 
have  protected  the  mass  of  the  members  against 
the  evident  money  loss  incident  to  the  normal 
lapse  of  a  certain  proportion  of  the  members  as- 
sessed for  losses  already  sustained  was  not  permit- 
ted in  many  States.  Law  also  stood  ready,  if  the 
management  of  an  association,  learning  wisdom  from 


361 

experience,  sought  to  adjust  in  accordance  with 
the  mortality  tables  the  growing  loss  that  came 
after  the  earliest  years,  to  charter  the  new  and 
irresponsible  association  with  power  to  entice  the 
healthy  member  of  the  old  organization,  with  the 
lure  of  the  psuedo  cheapness  of  a  new  member- 
ship, to  abandon  his  contract  and  leave  the  less 
physically  perfect  members  to  bear  accumulated 
and  future  cost,  without  the  recompense  of  even  a 
pretended  forfeiture  in  reparation  of  deterioration, 
since  law  forbade  the  collection  in  advance  of  the 
moneys  from  which  such  forfeiture  could  be  ex- 
acted. 

It  is  the  fashion  to  look  to  Massachusetts  in  con- 
demnation of  evils  ascribed  to  selfish  managements 
and  greedy  officials,  eager  for  their  own  personal 
gain,  rather  than  for  the  building  of  permanent  in- 
stitutions. How  many  have  asked  the  question : 
What  aid  did  the  law  hold  out  to  men  eager  to 
build  for  permanence  ?  It  did  not  even  permit  the 
accumulation  in  advance  of  the  amount  of  one  death 
claim — not  even  the  holding  of  the  proceeds  of  one 
assessment !  But  it  did  make  it  possible,  if  a  man- 
agement sought  honestly  to  place  upon  the  member 
his  proportion  of  the  cost  increasing  with  increas- 
ing age  and  to  collect  on  that  basis  for  the  insurance 
which  the  law  compelled  it — if  sold  at  all — to  sell 
on  credit,  for  any  seven  men  who  could  raise  five 


362 

dollars  for  a  charter  fee  and  obtain  credit  for  a 
little  printing  to  secure  the  authorization  of  the 
Commonwealth  to  operate  a  competing  institution 
to  underbid  the  one  already  established  on  the 
fairly  probable  chance  of  a  smaller  death  rate  for 
the  year  or  two  or  three  that  the  older  organiza- 
tion antedated  the  new  !  These  men  had  given 
labor  and  effort  and  force  that  is  truest  capital  to 
their  enterprise  ;  they  had  built  up  a  mass  of  mem- 
bership at  a  smaller  outlay  than  that  by  which 
such  a  mass  had  ever  before  been  gathered  together 
in  a  business  organization,  and  they  hoped  to  con- 
quer the  evils,  not  heeding  the  unwelcome  truth 
that  the  results  of  the  earlier  conditions  imposed 
upon  them  had  so  grown  with  passing  years  as  to 
render  what  at  first  was  simply  injurious,  at  last 
fatal. 

It  is  not  my  purpose  to  defend  ;  I  am  simply 
aiming  to  present  facts  ;  and  the  facts  are  that  from 
the  all  too  scant  provision  originally  made  for  ex- 
penses, the  men  who  had  built  up  these  institu- 
tions, lioping  for  an  honest  return  for  labor  given, 
came  at  last  to  divert  a  larger  and  larger  proportion 
to  an  effort  for  personal  gain  in  the  few  years  of 
life  that  the  conditions  fostered  by,  if  not  born  of, 
the  law  seemed  to  render  possible  The  facts  are 
that,  when  the  first  accumulation  was  undertaken 
by  these  institutions,  no  warrant  in  law  for  even 


363 

the  small  sum  aimed  at  existed  ;  the  fact  is  that  it 
was  looked  upon  as  a  great  concession  when  the 
accumulation  of  one  assessment  to  be  held  in  antici- 
pation of  a  death  and  then  immediately  paid  out 
was  permitted  by  law,  and  when  it  was  provided 
that  if  an  assessment  would  produce  less  than 
$10,000,  that  sum  could  nevertheless  be  held.  The 
fact  is  that  even  so  intelligent  a  commissioner  as 
John  K.  Tarbox  urged  the  Committee  on  Insurance 
of  the  General  Court,  as  late  as  1885,  to  place  the 
limit  of  one  assessment  upon  the  accumulation 
permitted  these  associations.  The  fact  is  that  the 
associations  for  years  fought  for  the  mere  right  to 
accumulate  security.  The  fact  is  that  the  State 
continued  and  continues  to  this  day  to  allow  the 
membership  of  established  associations  to  be  under- 
mined by  the  specious  offers  of  new  and  irresponsi- 
ble organizations  which  it  freely  charters  to  do  the 
very  business  under  the  very  conditions  that  time 
has  proved  to  be  dangerous  and  finally  fatal ! 

Given  a  strong  and  general  movement  favorable 
to  the  development  of  life  insurance  among  the 
people,  laws  that  well-nigh  enabled  every  man,  if 
not  to  be,  at  least  to  have,  his  own  company ; 
laws  that  presented  the  gravest  difficulties  to  the 
management  which  aimed  to  make  of  an  assess- 
ment company  a  strong  and  permanent  institution  ; 
and  administration    of    law   that  too    frequently 


364 

operated  upon  the  assumption  that  nothing  of  good 
could  come  out  of  the  Nazareth  of  Assessment  In- 
surance, and  we  have  conditions  eminently  favor- 
able to  the  graveyard  frauds  of  Pennsylvania  ;  the 
speculative  endowment  orders,  which  had  no  ele- 
ment of  life  insurance  in  their  make-up  ;  the  old 
age  monstrosities  of  Indiana,  and  the  proprietary 
organizations  of  Massachusetts,  which  degenerated 
into  articles  of  bargain  and  sale.  Yet,  when  of 
these  one  has  summed  the  total  chargeable  to  life 
insurance  and  set  against  it  the  actual  aggregate  of 
from  $800,000,000  to  $1,000,000,000  paid  within  a 
single  generation  to  the  widows  and  orphans  of  the 
land,  he  cannot  deny  that  at  the  foundation  of  this 
movement  was  an  honest  purpose  to  accomplish 
honest  results,  and  that  the  financial  integrity 
which  has  been  shown  in  the  management  of  com- 
panies will  bear  favorable  comparison  with  that  of 
any  other  business  approaching  this  in  magnitude 
of  operation  that  has  been  carried  on  during  the 
same  period. 

One  of  the  grave  faults  of  the  movement— a  fault 
from  which  many  of  the  companies  have  suffered, 
and  are  still  suffering  most  seriously — was  the  in- 
adequate jjrovision  for  expenses.  As  life  insur- 
ance has  developed  and  is  now  practiced  by  the 
companies  operating  under  the  ordinary  law,  it 
collects  in  its  premium  account  the  current  mortal- 


365 

ity  cost,  payments  on  account  of  future  mortality, 
the  heavy  investment  payments  involved  in  endow- 
ment, and  the  expense  of  doing  the  business,  which 
latter,  subsequent  to  the  initial  year,  can  legiti- 
mately be  increased  but  slightly  by  the  expenses 
attending  the  care  of  investments.  The  assess- 
ment company  has  practically  collected  only  the 
first  and  last  named  of  these  items,  and  yet  in  so 
doing  has  incurred  the  vast  bulk  of  the  expense 
attendant  upon  a  life  insurance  business,  thus 
necessarily  rendering  a  determination  of  results  by 
ratios  peculiarly  unfair  when  comparison  is  made 
with  a  method  of  business  where  the  premiums 
gross  are  enhanced  by  large  elements  of  accu- 
mulation that  the  assessment  companies  are  not 
permitted  to  collect.  On  a  basis  of  comparison  that 
shall  give  the  companies  that  accumulate  large  in- 
vestments fair  credit  for  the  expenses  thereby  in- 
volved and  then  measure  the  insurance  expenses  by 
the  results  accomplished,  the  most  legitimate  criti- 
cism of  the  assessment  companies  will  be  that  they 
have  not  always  expended  sufficient  money  to  do 
well  the  work  which  they  have  had  to  do. 

To  many  minds  the  most  pronounced  tendency  of 
the  assessment  movement  has  been  in  the  direction 
of  assimilating  itself  to  so-called  old-line  insurance, 
for  which  is  claimed  every  factor  of  sound  theory 
and  practice.     I  leave  to  its  adherents  responsibility 


366 

for  a  proposition  that  might  be  construed  to  imply 
that  so-called  old-line  or  legal-reserve  life  insurance 
is  so  perfect  as  to  have  before  it  possibility  of  but 
one,  and  that  the  great  final,  change  ;  but  for  my- 
self I  am  not  prepared  to  believe  that  for  life  in- 
surance there  is  not  still  possibility  of  growth  and 
adaptation  to  new  needs.  If,  however,  all  the 
principles  possible  to  true  life  insurance  are 
massed  in  the  present  practice  of  the  companies 
operating  under  the  legal-reserve  law,  then  this 
tendency  of  the  assessment  movement  should  be 
ground  for  commendation  and  not  condemnation. 
If  honest  men  have  made  errors  they  can  afford  to 
put  their  pride  in  their  pockets  while  they  correct 
them,  and  do  not  need  to  give  themselves  much 
trouble  on  the  score  of  the  self-complacency  of 
their  fellows,  who  were  born  with  all  the  perfections, 
including  self-appreciation. 

As  far  as  the  charge  implies  that  there  has  been 
a  constantly  increasing  tendency  toward  the  unal- 
terable principles  that  lie  at  the  foundation  of  real 
life  insurance,  I  hope  it  to  be  true — I  believe  it  is  ; 
and  I  am  confident  that  had  the  law  been  less  re- 
pellant,  had  there  been  greater  willingness  in  ad- 
ministration to  substitute  aid  for  criticism,  that 
tendency  would  have  developed  more  rapidly, 
made  progress  more  steadily,  reached  consumma- 
tion through  less  costly  avenues,  until  to-day  the 


367 

problems  which  give  to  the  future  of  the  assess- 
ment movement  any  uncertainty  would  be  far  on 
their  way  toward  solution. 
The  progress  that  has  been  made  has  embraced  : 

1.  The  substitution  of  a  definite  benefit  for  one 
conditioned  on  the  amount  of  an  assessment. 

With  the  passage  of  the  Massachusetts  law  of 
1885  came  the  end  of  the  conditional  benefit  for 
companies  that  sought  to  do  a  general  business. 
Practically,  from  that  time  on,  every  such  company 
has  treated  its  policies — no  matter  what  the  techni- 
cal contract  provision— as  carrying  fixed  benefits. 
Of  course  the  critics  of  the  system  have  not  all  dis- 
covered this  fact.  It  was  hardly  to  be  expected — 
it  occurred  only  thirteen  years  ago. 

2.  The  issuance  of  the  post-mortem  assessment 
contract  has  been  abandoned. 

This  also  was  in  part  a  result  of  the  Massachu- 
setts law  of  1885 — a  law  that  had  in  it  so  much  of 
good  and  has  been  the  copy  for  so  much  subsequent 
legislation  that  it  will  ever  remain  a  pity  that  it 
did  not  go  one  step  further  and  compel  the  collec- 
tion in  advance  of  an  adequate  premium  based  on  a 
standard  table. 

3.  The  principle  of  partial  reservation  has  been 
adopted. 

The  value  that  might  have  attended  this  step 
has,  however,  been  greatly  diminished,  by  the  un- 


368 

certainties  involved  in  operating  under  laws  not 
adapted  to  the  maintenance  of  true  reservation, 
laws  that  not  infrequently  have  been  interpreted 
along  the  line  of  forbidding  that  which  they  do  not 
expressly  authorize,  thus  making  them  a  barrier  to 
the  development  of  the  companies  in  the  direction 
in  which  every  honest  official  should  desire  to  see 
them  develop. 

What  remains  to  be  done  is : 

1.  To  close  the  door  to  the  creation  of  irrespon- 
sible and  unnecessary  associations. 

2.  To  place  at  the  foundation  of  the  business  ad- 
equate premiums  collected  in  advance. 

3.  To  substitute  true  reservation  on  an  approved 
standard  for  the  unscientific  and  imperfect  methods 
that  now  prevail. 

The  first  step  to  this  end  was  taken  during  the 
legislative  session  of  1898.  A  much  longer  step 
should  be  taken  in  1899.  When  taken  it  should 
be  had  with  full  regard  to  the  fact  that  the  assess- 
ment movement  has  become  the  great  repository  of 
the  term  life  insurance  of  the  country.  Legisla- 
tion should  be  so  shaped  as,  if  possible,  to  preserve 
a  phase  of  the  business  of  life  insurance,  which, 
largely  ignored  by  the  companies  operating  under 
the  general  law,  has  in  it  elements  of  almost  im- 
measurable value  to  the  great  mass  of  insurers. 

The  corollary  of  yearly  term  insurance  without 


369 

accumulation  other  than  the  unearned  tabular 
premium  to  the  date  of  next  premium  payment  is 
re-examination  medically  as  a  prerequisite  of  the 
right  of  renewal.  In  other  words,  the  right,  inher- 
ent to  the  one  party  to  the  contract,  of  continuing 
after  a  given  period,  or  of  discontinuing  at  that 
date  at  option,  is  worth  something  and  should  be 
paid  for.  The  policy-holder  who  may,  at  the  end 
of  sixty  days,  of  six  months,  of  one  year,  or  of  ten 
years  of  membership,  continue  or  cease  to  purchase 
insurance  at  his  personal  option,  has  not  met  the 
full  obligations  of  membership  by  simply  paying 
the  mortality  cost  of  his  insurance  during  the  term 
the  risk  has  been  carried,  and  his  share  of  the  ex- 
penses. Those  rates  only  are  adequate  in  such 
cases  as  will  make  provision,  in  addition  to  these 
two  elements,  for  compensation  to  the  mass  of  the 
membership  for  the  value  of  an  option,  which  will 
be  exercised  for  the  benefit  of  the  individual  and 
not  of  the  mass. 

Medical  examination,  however,  minimizes  the 
value  and  the  risk  of  this  option,  so  that  the  gen- 
eral rule  may  safely  be  modified  during  what  may 
be  regarded  as  the  inception  period  of  the  life  in- 
surance contract,  which  may  be  measured  by  the 
initial  twelvemonth.  During  this  period  occurs 
the  extraordinary  expense  involved  in  the  obtain- 
ing of  the  business— an  expense  which,  within  rea- 


370 

sonable  limits,  will  be  largely  regulated,  however 
one  may  reason  theoretically  of  the  ''should  be" 
— by  the  ''is" — actual  competition,  the  market 
value  of  the  services  demanded,  the  assumed  ne- 
cessity for  new  business,  the  costliness  of  the  im- 
pression made  on  the  public  mind  by  a  decreasing 
business,  the  element  of  personal  pride  in  its  rela- 
tion to  apparent  prosperity.  Possibly,  in  relation 
to  many,  if  not  all,  of  these  factors,  it  can  be  de- 
monstrated that  the  representatives  of  a  great  busi- 
ness should  be  above  submitting  to  their  influence, 
and  certainly,  when  the  demonstration  is  made,  we 
shall  continue  to  discover  for  the  future,  as  in  the 
past,  that  life  insurance  companies  are  managed 
by  men,  for  men,  and  that  human  nature  is  still  a 
factor  to  be  reckoned  with. 

Certain  it  is  that  under  existing  conditions,  that 
under  any  conditions  that  are  apt  again  practically 
to  exist,  the  first  year's  premium — save  perhaps  in 
the  case  of  endowments  for  the  shortest  terms — 
cannot,  after  meeting  the  mortality  of  the  year  and 
the  expenses  attendant  upon  securing  the  busi- 
ness, be  made  to  yield  anything  toward  the  pay- 
ment of  the  cost  of  insurance  in  future  years.  If 
the  fiction  is  insisted  in  of  a  reserve  to  that  end,  it 
must  remain  a  fiction  and  the  money  must  be  had 
from  some  other  source  and  must  be  diverted  from 
the  performance  of  its  proper  function  to  the  main- 


371 

tenance  of  a  pretense.  Why  continue  this  fiction  ? 
Certainly  why,  if  you  are  now  to  place  under  the 
reserve  accumulating  requirement — as  place  it  you 
evidently  must — a  great  business  which  has  grown 
up  with  laws  which  have  almost  or  quite  forbidden 
such  accumulation,  burden  it  with  this  fiction  with 
its  menace  to  technical  solvency,  constituting  an 
artificial  factor  with  which  a  management,  better 
cognizant  than  others  can  be  of  the  actual  needs  of 
the  membership  as  a  concrete  body,  must  account 
in  every  movement  that  involves  the  questions  of 
new  business,  extension  of  operations,  introduction 
of  new  forms  of  contract  ? 

/  am  clearly  of  the  opinion  that  in  shaping  the 
reserve  requirements  of  the  assessment  company 
of  the  future^  the  " reserve^ ^  on  business  in  its 
first  year  should  he  limited  to  the  unearned  pre- 
mium to  the  next  date  when^  failing  the  payment 
of  a  further  premium,  the  risk  will  terminate. 
A  possible  exception  to  this  rule  would  be  where 
the  term  of  premium  payment  is  so  brief  that 
reservation  upon  the  basis  of  an  age  one  year 
greater  and  a  term  one  year  less  than  the  age  of 
entry  and  the  nominal  term  would  call  for  a  net 
premium  in  excess  of  the  net  sum  remaining  after 
deducting  from  the  office  premium  the  percentage 
which  expenses  subsequent  to  the  first  year  have 
borne  to  premiums  on  business  more  than  one  year 


372 

old  during  a  given  number  of  years.  Any  such 
deficiency  should  be  charged  at  its  annuity  value 
as  an  added  reserve. 

Limiting  the  legal  requirement  as  to  reservation 
on  policies  in  the  initial  year  of  insurance  as 
above,  a  different  treatment  should  prevail  from 
the  date  the  policy  enters  upon  its  second  year 
of  insurance — a  treatment  determinable  from  the 
terms  of  the  contract  and  the  standard  of  reserva- 
tion, with  due  regard  to  the  probability  that  for  a 
time  at  least  companies  operating  under  such  modi- 
fied assessment  law  will  continue  to  write  the  bulk 
of  their  business  on  the  term,  as  distinct  from  the 
whole-life  plan. 

This  latter  probability  calls  for  the  consideration 
of  the  emergency  fund  as  distinct  from  the  reserve 
and  for  its  adjustment  on  something  other  than  a 
mere  arbitrary  basis.  The '"reserve"  on  a  policy 
on  which  the  premium  payment  is  to  remain  un- 
changed beyond  the  term  for  which  payment  has 
been  made  consists  of  two  parts— the  unearned 
premium  to  the  date  when  the  next  premium  pay- 
ment falls  due  and  the  payment  made  on  account 
of  insurance  to  be  given  after  that  date.  In  the 
case  of  policies  for  whole  life,  where  uniformity  is 
to  be  maintained  throughout  the  term  of  premium 
payment,  the  latter  factor  soon  becomes  the  pre- 
dominating one  and  the  former  is  comparatively 


373 

insignificant,  but  in  the  case  of  a  term  policy,  the 
former  must  always  maintain  a  comparatively  com- 
manding importance  which  is  greatly  enhanced  in 
proportion  as  the  duration  of  the  two  periods  —the 
one  for  which  full  payment  has  been  made  in  ad- 
vance and  that  for  which  partial  payment  only  has 
been  made — approach  equality.  In  the  last  year  of 
the  term — where  the  premium  is  paid  yearly  in  ad- 
vance— under  a  term  contract,  the  former  factor 
alone  exists,  and,  at  the  end  of  the  term,  it  will  be 
wholly  earned  and  (on  assumption)  consumed.  If 
at  that  moment  the  member  assumes  the  relation  of 
an  outsider  who  can  continue  insurance  only  upon 
the  conditions  imposed  upon  every  other  applicant 
for  insurance,  equities  are  preserved  and  safety  as- 
sured ;  but  the  business  of  assessment  insurance 
has  been  and  will  continue  to  be  largely  in  the  na- 
ture of  renewable  term  insurance,  with  the  option 
in  the  individual  at  each  date  of  premium  payment 
to  continue  or  discontinue.  As  stated  above,  this 
demands  something  more  than  the  mere  reservation 
of  the  unearned  premium  to  the  date  of  next  pre- 
mium payment,  and  it  is,  in  my  opinion,  here  that 
the  so-called  "  Stipulated  Premium  Laws"  already 
passed  fail,  and  not  in  the  fact  that  they  provide  a 
means  for  the  sale  of  renewable  term  insurance 
upon  natural  premiums,  as  has  been  urged  against 
them. 


374 

The  need  of  this  supplemental  fund — forfeitable 
in  event  of  non-continuance  of  insurance — exists 
in  renewable  term  insurance,  no  matter  what  the 
character  of  the  company  which  conducts  the  busi- 
ness, for  it  is  a  fallacy  to  assume  that  such  insur- 
ance can  safely  be  sold  upon  the  basis  as  to  net 
premium  payments  that  correspondingly  is  em- 
ployed in  calculating  the  premium  for  whole  life 
insurance,  with  the  attendant  considerable  ac- 
cumulation. In  other  words,  while  the  net  pre- 
mium of  $23.68  collected  yearly  in  advance  from  a 
man  now  aged  40,  with  interest  at  4  per  cent.,  is 
the  exact  monetary  equivalent  of  the  natural 
premiums  under  the  actuaries'  table,  the  insur- 
ance-purchasing power  of  the  two  methods  of  pay- 
ment is  and  always  will  be  widely  different  and 
the  member  who  contracts  to  pay  on  the  scale  of 
natural  premiums  must  pay  an  additional  sum 
that  will  establish  equivalence  as  a  forfeiture  pen- 
alty. Wh^n  the  selling  company  has  a  vast  pre- 
ponderance of  insurance  on  other  plans,  the  appar- 
ent effect  of  the  comparatively  small  amount  of 
term  insurance  will  be  but  small,  while  in  the 
case  of  the  company  which  sells  this  insurance  ex- 
clusively, the  effect  may  be,  and  not  improbably 
will  be,  vital. 

The  future  of  assessment  life  insurance  is, 
therefore,  the  solution  of  the  double  problem  of 


375 

the  conservation  of  the  business  existent  in  the 
organizations  now  operating  under  that  method, 
and  the  preservation  of  those  organizations  under 
conditions  as  to  future  business  that  will  compel 
security  and  compliance  with  fundamental  laws 
and  sound  business  methods.  The  one  implies 
the  other,  for  the  first-named  aim  is  to  be  at- 
tained only  by  the  continued  existence  of  the  or- 
ganizations, to  which  the  requirements  last  named 
are  imperative.  I  beg  to  submit  that  the  obliga- 
tion of  the  State,  and  its  supervising  officials,  is 
far  different  under  existing  conditions  than  it 
might  be  if  the  question  were  newly  presented  of 
the  chartering  of  organizations  for  the  transaction 
of  a  life  insurance  business.  The  State  has  given 
being  to  these  associations ;  it  has  authorized  the 
business  that  has  been  done,  and  while  it  is  its 
duty  to  place  future  business  on  a  sound  basis,  it  is 
equally  an  obligation  that  it  owes  to  the  members 
of  these  associations  to  aid  in  the  work  which  their 
managements  are,  as  a  rule,  honestly  undertaking 
of  preserving  the  business  already  in  force. 

It  is  not  the  purpose  of  this  paper  to  point  out 
the  lines  which  legislation  should  take,  but  simply 
to  outline  the  fundamental  principles  which  should 
govern  the  future  of  the  business ;  principles 
that  any  management  can  put  into  operation  ; 
principles   to  which,  I    believe,    the    supervising 


376 

officers  of  our  States  as  a  rule  will  give  their  ap- 
proval and  that  our  State  law-makers  will,  so  far 
as  the  law  is  now  deficient,  aid  in  putting  in  prac- 
tice by  necessary  legislation.  But  legislation  in 
one  regard  is  absolutely  essential  to  future  secur- 
ity. I  refer  to  the  immediate  withdrawal  of  the 
power  to  create  irresponsible  organizations  for 
the  carrying  on  of  life  insurance.  To  this  end,  in 
States  where  the  law  provides  for  the  granting  of 
special  charters  to  companies  purposing  to  operate 
under  other  methods,  the  same  provision  should 
be  placed  upon  the  statute-books  in  regard  to 
future  organizations  on  the  assessment  method. 
Where  provision  is  made  for  organization  under 
the  general  law,  the  requirement  of  Article  X  of 
the  Insurance  Law  of  New  York  seems  to  cover 
the  ground,  excepting,  perhaps,  that  there  could 
be  permitted  to  the  organization  a  given  number  of 
years  in  which  to  complete  the  $100,000  deposit — 
say  five,  one-fifth  to  be  made  at  organization  and 
one-fifth  yearly  thereafter,  provided  the  require- 
ment is  rigidly  insisted  upon  that  a  company  from 
another  State  must  have  the  full  $100,000  on  deposit. 
Returning  to  the  consideration  of  business  al- 
ready in  force,  a  company  should  collect  in  ad- 
vance from  every  member  such  a  minimum  sum 
applicable  only  to  mortuary  purposes  as,  together 
with  any  sum  to  the  credit   or  available  to  be 


377 

passed  to  the  credit  of  the  member,  will  at  least 
equal  the  tabular  death  cost  by  the  actuaries' 
table  of  mortality  to  the  date  when  a  failure  to 
pay  another  premium  will  absolutely  terminate  the 
risk.  If  the  death  rate  of  the  preceding  twelve 
months  has  been  in  excess  of  the  actuaries'  table, 
the  percentage  of  excess  should  be  added  and  col- 
lection made  on  the  basis  thus  determined. 

In  case  the  premium  basis  is  a  stated  payment, 
determined  by  any  age  other  than  that  attained, 
such  payment,  less  the  provision  for  expenses, 
should  be  treated  as  a  net  premium,  with  reserva- 
tion by  the  actuaries'  table  at  a  rate  of  interest 
not  higher  than  4  per  cent,  based  on  age  of  entry 
and  the  number  of  years  the  insurance  has  been  in 
force,  save  that  if  the  contract  provides  that  the 
first  year's  insurance  is  single  year  term  insurance, 
the  date  of  entry  is  to  be  made  one  year  later  and 
the  age  of  entry  one  year  greater.  The  existence 
of  the  full  reserve  so  determined  should  be  regarded 
as  a  necessary  condition  of  the  maintenance  of  the 
original  premium.  An  impairment  of  the  reserve 
calls  for  readjustment  of  rate  to  that  of  attained 
age  in  accordance  with  the  scale  of  original  calcula- 
tion, with  reduction  of  nominal  rate  by  the  annuity 
value  of  the  actual  reserve  for  the  time  covered  by 
the  new  net  premium  ;  or  for  the  collection  of  the 
deficiencies  by  special  call. 


378 

The  contract  is  thus  treated  as  a  contract  of  re- 
newable term  insurance,  which  is  its  essential 
character.  The  determination  oi  the  net  premium 
is  in  accord  with  the  terms  of  the  contract  and  the 
reservation  determined  is  the  unearned  premium  if 
the  mortality  experience  and  interest  earnings 
have  conformed  to  the  standard.  In  so  far  as  they 
have  been  more  favorable,  the  benefit  accrues  to 
prolong  the  term  during  which  readjustment  to  at- 
tained age  is  unnecessary  or  to  increase  the  reduc- 
tion value  of  the  reserve  if  readjustment  at  a  speci- 
fied date  is  a  condition  of  the  contract.  The  mem- 
ber thus  receives  the  benefit  of  gain  through  lapse, 
reduced  mortality,  increased  interest  or  reduced 
expense,  through  the  extension  of  the  term  during 
which  the  original  premium  proves  sufficient. 
This  is  in  exact  accord  with  the  theory  upon  which 
the  pre-determined  premiums  employed  in  assess- 
ment insurance  are  based,  namely,  that  the  savings 
from  reduced  mortality  and  expenses  and  the  gain 
from  lapses  will  enable  whole  life  insurance  to  be 
given  on  the  basis  of  what  is,  by  the  standard, 
simply  a  term  premium. 

If,  as  in  the  case  with  many  of  these  contracts, 
there  is  a  fixed  term  of  years  at  the  expiration  of 
which  the  premium  rate  is  to  be  advanced  to  that 
of  attained  age,  such  readjustment  should  be 
rigidly  made  at  the  date  fixed,  with  reduction  in 


379 

the  nominal  amount  of  premium  by  the  annuity 
value  for  the  new  term  of  any  accumulation  prop- 
erly apportionable  to  the  insurance.  This  form  of 
contract,  with  the  accumulation  of  savings,  forfeit- 
able if  the  insurance  is  not  continued,  protects  the 
general  membership  of  the  association  to  a  degree 
to  which  it  is  not  protected  if  the  date  of  readjust- 
ment is  determined  by  the  actual  exhaustion  of  the 
reserve.  Where,  however,  the  net  premium  as  de- 
termined by  the  terms  of  the  contract  is  less  than 
that  fixed  by  the  standard  for  the  term  named, 
such  protection  is  attained  only  in  event  of  the 
savings  increasing  the  accumulation  beyond  the 
standard  reservation.  The  impairment  of  the  re- 
serve under  such  conditions  should  be  the  signal 
for  immediate  readjustment  of  rates,  even  though 
the  date  named  in  the  contract  for  readjustment 
has  not  arrived. 

In  the  deductions  to  be  made  froiii.  the  gross 
premium  to  obtain  the  net,  if  the  contract  (in  which 
is  included  the  Constitution  and  By-Laws  of  a 
mutual  organization)  provides  that  in  addition  to 
a  fixed  sum  for  expenses,  certain  specified  expenses 
shall  be  paid  from  the  proceeds  of  assessments,  the 
percentage  that  will  thus  be  consumed  should  be 
determined  from  the  average,  say  of  the  three  or 
five  preceding  years,  but  should  not  be  made  less 
than  that^sed  in  the  immediately  preceding  twelve 


880 

months.  Moneys  once  set  aside  as  applicable  to 
mortuary  purposes,  should  under  no  conditions  be 
employed  to  meet  expenses.  The  only  application 
of  surplus  in  the  form  of  so-called  "dividends" 
under  such  a  contract  would  be  (1)  in  reduction  of 
the  premium  adjusted  to  attained  age  ;  or  (2)  the 
cash  payment  of  any  surplus  which  may  arise  in 
excess  of  the  full  standard  reserve  on  the  basis  of 
the  entire  possible  term  of  duration  of  the  contract. 
All  other  surplus  should  be  rigidly  held  to  extend 
the  term  before  readjustment  of  premium  ;  or,  what 
is  the  same  thing,  to  increase  the  reserve  until  it 
reaches  the  standard  amount  required  for  the  en- 
tire term  of  possible  duration  of  the  contract. 

If  reserve  is  determined  on  the  annual  basis,  the 
association  will  be  entitled  to  credit  against  it  to 
the  amount  of  the  deferred  net  premiums,  it  being 
assumed  that  cost  of  collection  is  included  in  the 
deductions*  made  on  expense  account.  In  deter- 
mining the  resources  to  offset  the  required  reserve, 
there  should  be  charged  against  the  assets  the  out- 
standing claims  and  accrued  liabilities,  and  the 
sum  of  $100,000,  where  the  proceeds  of  one  assess- 
ment is  equal  to  or  in  excess  of  that  sum,  and 
in  cases  where  one  assessment  will  produce  less 
than  that  sum  the  amount  of  one  assess- 
ment. Finally,  any  association  which  holds  as- 
sets  equal  in   value  to  at  least  its  ojitstanding 


381 

claims  and  accrued  liabilities  and  the  amount 
of  one  assessment  may  safely  be  given  a  period, 
say,  of  three  or  even  five  years  to  adjust  itself  to 
the  above  standard,  provided  the  adjustment  is 
not  left  to  the  end  of  the  period  named,  but  is  at 
once  taken  in  hand.  An  association  which  has 
assets  equal  to  outstanding  claims  and  accrued  lia- 
bilities, but  which  has  not  in  addition  the  amount 
of  one  assessment,  should  be  compelled  at  once  to 
make  extra  collections  sufficient  to  accumulate  the 
amount  of  such  assessment.  An  association  of 
which  the  assets  are  less  than  the  amount  of  claims 
and  accrued  liabilities,  should  cease  doing  new 
business  until  it  has  brought  its  assets  up  to  the 
point  where  the  claims  and  accrued  liabilities  are 
covered,  with  a  margin  of  at  least  one  assessment. 
It  is  needless  to  add,  of  course,  that  the  association 
in  which  a  single  assessment  will  not  cover  the 
amount  of  its  maximum  policy  should  be  required 
to  cease  business.  Contracts  under  which  the  term 
of  premium  payment  is  less  than  the  term  of  pos- 
sible duration  (which  would  include  '' paid-up" 
policies)  should  be  required  to  maintain  a  reserve 
not  less  than  that  called  for  by  the  actuaries' 
table  with  interest  at  4  per  cent. 

In  the  matter  of  future  business,  the  general  out- 
lines of  the  treatment  of  the  business  already  in 
force  should  prevail,  but  it  is  of  course  easily  pos- 


382 

sible  to  adopt  in  advance  precautions  and  safe- 
guards which  are  not  of  ready  application  to 
business  written  under  entirely  different  con- 
ditions. A  management  having  in  charge  the 
conservation  of  business  of  any  magnitude — and 
especially  where  any  considerable  portion  of  such 
business  has  been  written  under  conditions  or 
forms  of  contract  that  do  not  easily  adjust  them- 
selves to  the  demands  of  sound  methods — should 
look  with  special  jealousy  upon  the  impulse  to 
make  of  first  importance  the  writing  of  a  great 
bulk  of  new  business.  It  is  as  easily  possible  in 
life  insurance  as  elsewhere  to  pay  too  dearly  for 
the  whistle,  and  the  management  of  any  company 
which  has  upon  its  books  a  sufficient  mass  of  busi- 
ness to  give  an  ample  field  for  the  operation  of  the 
laws  of  average,  will  find  in  the  conservation  of 
such  business  and  the  writing  of  a  normal  and 
moderate  amount  of  new  business  full  play  for  its 
ability,  which  will,  not  improbably,  expend  itself 
to  much  less  advantage  if  devoted  to  the  effort  to 
produce  or  continue  phenomenal  results  in  the 
matter  of  amount  of  production. 

In  the  application  to  future  business  of  the  prin- 
ciples laid  down  for  regulating  the  business  already 
in  existence,  such  business  (excluding  all  question 
of  endowments)  divides  itself  naturally  into  four 
classes : 


383 

a.  Single  year,  renewable  term  insurance. 
h.  Term  insurance,  with  readjustment  of  pre- 
mium at  the  end  of  a  specified  term. 

c.  Insurance  which  is  to  be  paid  for  by  a  uni- 

form premium  throughout  the  entire 
term. 

d.  Insurance   where  the  term  of    premium 

payment  is  less  than  the  full  possible 
term  of  the  insurance. 

While  a  place  is  given  here  for  ''whole  life" 
insurance,  in  strictness,  all  insurance  ought  to  be 
confined  to  a  term  limit  bounded  by,  say,  seventy 
years  of  age,  either  with  or  without  the  supple- 
mental feature  of  endowment  (including  in  the 
term  the  accumulation  of  the  future  cost  of  the 
benefit  and  annuity  provisions) ;  and  this  limita- 
tion is  always  approached  in  practice,  since  the 
contract  that  does  not  carry  with  it  accumulation 
to  a  degree  which  practically  nullifies  the  factor  of 
insurance  cannot  profitably  be  carried  beyond  that 
age  and  will  be  carried  only  because  of  a  mistaken 
notion — fostered  of  late  years  by  the  over-zest  to 
misrepresent  the  results  accomplished  by  assess- 
ment insurance — that  there  is  a  loss  of  previous 
premium  payments  if  the  policy  is  abandoned. 

a.  All  contracts  of  Yearly  Renewable  Term  In- 
surance should  be  written  to  terminate  on  arrival 
at  an  age  not  greater  than  seventy  years,  and  in 


384 

addition  to  the  full  single  year  net  premium,  based 
on  the  actuaries'  table  of  mortality  at  attained 
age,  and  the  provision  for  expenses,  there  should 
be  collected  and  held  as  a  forfeit  in  event  of  discon- 
tinuance a  sum  equal  to  from  five  to  ten  per  cent, 
of  the  single  premium  for  the  term  for  which  the 
contract  carries  the  right  to  purchase  insurance. 
Such  single  premium  measures  practically  the 
present  value  of  all  insurance  which  can  possibly 
be  purchased  under  the  contract,  and  a  percentage 
of  deposit  exacted  from  the  inception  of  the  con- 
tract would  equitably  measure  the  value  of  the 
individual  right  of  discontinuance.  The  contract 
should  provide  for  the  collection  each  year  (not 
simply  during  the  initial  year)  of  the  net  premium 
for  attained  age.  Such  net  premium  should  be 
absolutely  collected,  less  any  excess  of  the  individ- 
ual deposit  and  interest  earned  thereon  over  the 
fixed  percentage  of  the  single  premium  at  attained 
age  ;  one-half,  say,  of  the  deposits  on  forfeited 
policies  to  be  held  to  meet  death  losses  in  excess  of 
tabular,  which  are  more  apt  to  occur  under  this 
form  of  policy  than  under  those  at  higher  rates  of 
premium.  Savings  in  mortality  should  be  added 
to  the  same  fund.  The  reserve  under  such  a  con- 
tract would  be  the  unearned  premium  paid  in 
advance,  or  the  unearned  premium  for  the  balance 
of  the  year,  less  deferred  net  premium.     One-half 


385 

the  deposits  on  forfeited  policies  should  be  available 
for  expenses,  to  aid  in  replacing  the  forfeited  busi- 
ness. Dividends,  cash,  paid-up  or  extended  insur- 
ance values  are  not,  of  course,  permissible  under 
such  a  contract,  save  that,  as  stated  above,  the 
released  portion  of  the  individual  deposit  is  applic- 
able toward  the  payment  of  the  renewal  premium. 
At  the  terminable  age  of  the  contract,  any  unused 
portion  of  the  original  individual  deposit  should 
be  returned,  aud  the  tabular  mortality  paid  may 
legitimately  be  adjusted  by  the  actual. 

Under  such  a  contract  premiums  are  paid  in  ad- 
vance to  the  full  tabular  amount  for  the  period  for 
which  insurance  is  absolutely  purchased  ;  the  un- 
earned premium  is  reserved  to  meet  the  unexpired 
term  for  which  payment  has  been  made  ;  the 
privilege  of  renewal  or  discontinuance  at  election 
is  paid  for  in  advance  and  the  price  paid,  based  on 
an  equitable  and  uniform  rule,  is  held  in  lieu  of  an 
Emergency  fund  arbitrarily  determined,  and  pro- 
vision is  made  to  counteract  the  forms  of  damage 
which  lapsation  brings  to  a  company.  The  appli- 
cation of  the  safety  clause  is  determined  by  any 
deficiency  in  funds  to  provide  for  outstanding 
death  losses,  the  unearned  premiums  and  the  de- 
posit at  attained  age  called  for  by  the  contracts  re- 
maining in  force.  Such  a  contract  would  be  pro- 
tected against  the  dangers  which  have  assailed  true 


386 

natural  premium  or  yearly  renewable  insurance  as 
it  lias  been  practiced  and  would  give  purely  pro- 
tective insurance  at  as  low  a  cost  as  is  compatible 
with  safety,  and  under  conditions  which  would 
render  failure  as  nearly  impossible  as  it  can  be 
made. 

h.  The  general  principles  which  govern  yearly 
renewable  term  insurance  will  govern  this  division 
also,  with  the  substitution  of  the  net  term  premium 
for  the  number  of  years  before  contract  reapportion, 
ment  for  the  net  annual  premium.  The  net  pre- 
mium based  upon  age  at  entry  and  the  single  year 
will  not  answer.  The  loading  of  that  net  premium 
by  a  uniform  percentage  will  not  accomplish  equity. 
The  net  premium  should  be  the  net  premium  for 
the  term  named,  or  the  term  x^receding  contract  re- 
adjustment should  be  that  fixed  by  the  net  pre- 
mium named  in  the  contract,  and  that  premium 
should  be  collected  each  year  during  the  term. 
Not  later  than  the  seventieth  year  of  age,  if  the 
privilege  of  continuing  the  contract  throughout 
possible  life  is  given,  the  contract  should  provide 
for  readjustment  of  net  premium  to  the  amount 
required,  when  supplemented  by  the  accumula- 
tions, to  remain  level  throughout  the  remainder  of 
life  under  the  actuaries'  table  with  interest  at  a 
rate  not  exceeding  4  per  cent.  If  the  initial  net 
premium  is  adjusted  to  a  terra  of  years  not  less 


387 

than  ten  in  number,  the  larger  reserve  which  the 
contract  will  carry  will  diminish  the  necessity  for 
a  preliminary  deposit,  but  security  will  be  con- 
sulted by  such  an  accumulation  in  excess  of  the 
reserve  as  will  render  it  impossible  that  the  con- 
tract can  be  at  any  time  abandoned  without  for- 
feiture of  a  sum  equal  to  from  5  to  10  per  cent,  of 
the  present  value  of  the  future  insurance  possible 
thereunder.  Under  such  a  contract  there  is  no 
place  for  dividends  save  in  the  modification  of  the 
readjusted  premiums,  until  the  accumulations  are 
sufficient,  together  with  the  net  premiums,  to  pro- 
vide for  the  insurance  to  the  end  of  the  possible 
duration  of  the  contract.  If,  however,  the  term  is 
a  long  one,  and  especially  if  it  is  proposed  by  the 
accumulation  of  surplus  to  extend  an  initial  long 
term  premium  to  cover  the  enter  lifetime,  cash 
surrender  or  paid-up  or  extended  insurance  will 
become  a  necessity  of  equity.  In  such  a  case  the 
element  of  forfeiture  must  not  be  lost  from  sight. 
In  the  part  that  these  values  have  come  to  play  in 
modern  life  insurance  contracts  the  State  may  yet 
be  called  upon  to  insist  by  legislation  on  the  pro- 
tection of  the  persistent  mass  of  policy-holders 
against  too  liberal  concessions  to  retirants  in  place 
of  the  present  legislation  looking  to  the  securing 
of  equity  to  such  retirants. 

Under  this  form  of  contract  those  contracts  of 


388 

assessment  companies  having  for  their  end  the 
granting  of  life  insurance  for  the  entire  term  of 
possible  life  at  a  premium  less  than  that  estab- 
lished by  the  legal  standard  with  the  ordinary 
loading  will  fall.  That  such  insurance  can  be 
safely  given  no  one  who  has  studied  the  matter 
will  venture  to  deny.  The  line  of  disagreement 
will  be  the  degree  of  reduction  that  can  be  ac- 
corded, and  none  will  probably  dispute  that,  with 
the  incorporation  of  the  safety  provision,  this  re- 
duction can  be  made  greater  than  would  be  pru- 
dent under  an  absolutely  limited  premium.  But 
such  a  provision  must  not  be  regarded  as  the  sub- 
stitute or  excuse  for  an  inadequate  initial  pre- 
mium. The  contract  in  question  becomes  in  effect 
a  long  term  contract,  the  time  named  presumably 
to  be  extended  to  full  life  by  the  accumulation  and 
application  of  surplus — something  in  the  nature  of 
the  endowment  contracts  at  life  rates  issued  by 
many  companies.  There  should,  however,  always 
be  in  such  a  contract  a  date  named  when  the  net 
premium  is  to  be  readjusted  by  the  accumulation 
actually  belonging  to  the  policy,  to  the  end  of  re- 
maining level  throughout  the  balance  of  life,  and, 
as  stated,  this  date  ought  not  to  be  later  than  age 
seventy.  Preceding  this  age  the  net  premium  may 
remain  constant  or  may  be  readjusted  at  intervals 
of  ten  or  any  other  number  of  years  ;  but  not  later 


389 

than  at  age  seventy  the  final  readjustment  should 
be  made,  with  the  privilege  of  withdrawal  as  sug- 
gested for  the  yearly  renewable  term  contract,  save 
that  as  the  right  of  continuance  is  here  given  there 
should  be  such  forfeiture  attached  to  the  discon- 
tinuance of  the  payment  of  future  premiums  as 
will  protect  the  company  against  the  adverse  selec- 
tion which  might  otherwise  result. 

The  main  point  in  this  contract  not  to  be  lost 
sight  of  is  that  the  period  intervening  before  a  con- 
tract readjustment  of  net  premium  is  to  be  covered 
by  a  net  premium  determined  by  the  State  Stand- 
ard, and  not  by  a  premium  arbitrarily  determined 
without  reference  to  sufficiency. 

c.  Failing  a  contract  date  of  readjustment  of  net 
premium— annually  under  the  renewable  term  con- 
tract and  at  fixed  intervals  under  those  considered 
under  ''b" — the  initial  net  premium  should  be 
sufficient  to  cover  the  entire  possible  term  of  the 
contract  and  reservation  should  be  in  accordance 
therewith.  In  other  words,  if  the  company  elects 
to  issue  a  contract  to  cover  any  fixed  term  of  years 
or  the  entire  possible  after  lifetime  and  does  not 
name  therein  a  date  when  an  accounting  shall  be 
taken  and  the  net  premium  readjusted  in  accord- 
ance with  actual  experience  to  the  State  standard, 
either  for  a  succeeding  term  or  for  life,  then  let 
the  conditions  of  such  contract  govern  as  the  con- 


390 

ditions  of  the  contracts  already  considered  are  to 
govern  in  each  case.  Let  the  premium  conform 
from  the  start  to  the  greatest  possible  strain  in- 
volved in  carrying  it  level  to  the  end. 

d.  This  contract,  treated  in  general  as  a  simple 
or  single  contract,  is  dual  in  character.  It  is  a 
contract  of  term  insurance  for  a  specified  number 
of  years,  supplemented  by  a  pure  endowment  for 
the  amount  of  the  single  premium  required  to  carry 
the  insurance .  from  the  termination  of  the  term 
insurance  to  the  end  of  possible  life.  The  term 
portion  of  the  dual  contract  should  be  treated  in 
the  same  manner  as  would  be  a  simple  term  con- 
tract for  the  same  number  of  years.  It  is  univer- 
sally recognized  that  the  introduction  of  the  accu- 
mulative element  necessitates  the  application  of 
different  rules,  but  when  these  rules  are  formulated 
they  are  made  to  apply  to  the  contract  as  a  unit 
and  not  to  the  contract  in  its  two- fold  character. 
An  attempted  recognition  of  this  dual  character  is 
to  be  found  in  the  new  blank  for  the  returns  of  as- 
sessment companies,  where  it  is  required  that  there 
shall  be  carried  as  a  liability  the  difference  of 
amount,  with  interest,  collected  on  policies  on 
which  the  term  of  premium  payment  is  limited, 
and  the  so-called  ^'whole-life"  rate.  Manifestly 
there  is,  however,  a  mistake  here,  and  the  amount 
should  be  the  difference  between  the  net  premium 


391 

on  a  term  insurance  for  the  number  of  years  to 
which  premium  payment  is  limited  and  the  net 
premium  on  the  limited  contract.  There  should 
also  be  a  requirement  compelling  an  adequate  net 
premium  by  the  State  standard.  As  matters  are 
to-day  the  company  can  make  any  addition  it 
chooses,  and  by  returning  that  as  a  liability,  com- 
ply with  the  blank,  however  inadequate  the  amount 
may  be  to  its  alleged  purpose. 

The  separation  should  be  made  for  the  reason 
that  the  conditions  which  would  call  for  the  enforce- 
ment of  the  safety  provision  would,  manifestly,  be 
very  different  under  a  contract  accumulative  in  char- 
acter and  one,  the  essential  purpose  of  which  is 
the  granting  of  benefits  payable  only  in  event 
of  death.  More  than  this,  it  is  the  accumulative 
side  of  the  contract  that  calls  for  cash  dividends, 
extended  and  paid-up  insurance  and  cash  surren- 
ders. This  portion  of  the  contract  should  exclu- 
sively regulate  their  amount  and  condition.  The 
limited  payment  contract  does  not,  therefore,  call 
for  exemption  from  the  application  of  the  safety 
provision,  but  for  such  separation  of  the  dual  con- 
tract as  to  its  parts  as  will  enable  the  safety  provi- 
sion to  apply  to  this  insurance  under  conditions 
other  than  those  which  regulate  its  application  to 
the  term  contract  written  for  the  same  period. 

Under  such  separation  it  would  be  feasible  to 


392 

provide  for  expense  contributions  to  care  for  ex- 
penses after  the  term  of  premium  payment ;  for 
protection  of  the  company  against  the  danger  to 
which  it  must  be  exposed  where  it  accords  to  the 
assured  the  unlimited  selection  of  cash  or  paid-up 
values  calculated  upon  the  same  basis,  and  even 
for  the  valuation  of  the  accumulative  portion  of 
the  contract  on  the  basis  of  a  lower  per  cent,  of  in- 
terest than  it  might  appear  necessary  to  apply  to 
the  insurance  portion,  a  by  no  means  improbably 
advantageous  precaution,  since  with  the  high 
standard  of  mortality  furnished  by  the  actuaries' 
table  it  might  be  entirely  safe  to  value  a  term  pol- 
icy on  a  basis  of  interest  not  regarded  as  meet- 
ing the  claims  of  prudence  where  the  premiums 
paid  are  wholly  accumulative.  Indeed,  it  might 
well  happen  that  the  insurance  contracts  of  a  com- 
pany were  meeting  wholly  the  requirements  of  the 
State  standard,  and  giving  ample  security  without 
resort  to  the  safety  provision,  while  a  large  accu- 
mulative business,  by  a  deficiency  in  the  interest 
earning  power  of  the  securities  in  which  the  accu- 
mulations were  invested,  might  cause  a  deficiency 
on  a  general  valuation.  Naturally  under  such  a  con- 
dition the  call  would  be  to  increase  the  net  premiums 
of  the  accumulative  branch  of  the  business,  and  not 
to  subject  the  insurance  portion  to  a  call  to  make 
good  the  deficiency  for  which  it  is  not  responsible. 


393 

In  the  "Battle  of  the  Standards  "  it  has  seemed 
to  me  desirable  to  place  at  the  foundation  the 
State  standard  and  to  provide  through  the  safety- 
provision  for  adjustment  to  the  standard  of  actual 
experience.  It  is  not  that  I  doubt  that  life  insur- 
ance has  been,  is  being,  and  will  continue  to  be 
^iven  at  cost  much  below  the  legal  standard,  if 
proper  care  is  had  to  the  selection  of  risks  and 
economy  in  administration,  but  because  it  seems  to 
me  that  the  fixing  of  such  a  standard  is  the  sim- 
plest method  of  assuring  the  collection  of  pre- 
miums ample  to  the  term  of  the  contract  presented 
by  the  present  condition  of  actuarial  science  and 
its  expression  through  recognized  authority  in  this 
country.  The  claim  of  the  supporter  of  actual  ex- 
perience is  that  a  certain  lower  premium  than  that 
of  the  standard  established  by  the  State  will  meet 
the  cost  of  insurance  and  give  security.  To. sup- 
port this  claim,  without  the  factor  of  expense 
which  the  law  leaves  it  wholly  in  his  power  to  reg- 
ulate, he  appeals  to  reduced  mortality  and  the 
lapse  element.  He  practically  alleges  that  a  cer- 
tain net  term  premium  will  meet  the  whole  life 
cost.  He  affirms  that  the  shorter  term  will  be 
lengthened  by  the  operation  of  the  forces 
he  appeals  to,  to  the  term  of  possible  life.  What- 
ever net  premium  he  adjudges  sufficient  will  meet 
the   State  standard   for  a  term  more   or  less  ex- 


394 

tended,  and  if  he  names  his  net  premium  and 
holds  it  inviolable  to  the  purpose  for  which  it  is 
collected,  no  possible  harm  can  result  from  the 
valuation  of  the  contract  on  the  basis  of  that  pre- 
mium by  the  State  standard  or  of  providing  that 
at  least  at  the  end  of  the  term  covered  by  the 
net  premium  in  accord  with  the  State  standard 
there  shall  be  an  adjustment  of  theory  to  actual 
facts  and  of  the  future  net  premium  to  the  accu- 
mulation actually  existing,  thereby  exchanging  the 
theoretical  value  of  the  savings  depended  upon  for 
the  reduction  of  cost  into  an  actual  credit,  so  far 
as  events  have  proved  the  original  theory  correct. 
Under  such  conditions  as  these  the  safety  provi- 
sion becomes,  not  a  supplement  to  an  inadequate 
original  premium,  but  an  added  element  of  safety 
to  meet  unforeseen  contingencies  or  emergencies — 
contingencies  or  emergencies  which  would  actually 
jeopardize  the  existence  of  the  institution  which 
did  not  have  such  a  recourse.  Under  these  condi- 
tions no  policy  would  be  issued  for  a  net  premium 
insufficient,  under  a  standard  approved  by  all 
authorities,  to  meet  the  cost  for  the  period  which 
the  contract  set  forth  that  such  premium  is  to 
cover.  Under  these  conditions  the  only  present 
liberty  denied  is  that  of  writing  contracts  on  an  in- 
adequate premium  payment  and  continuing  them 
beyond  the  point  where  they  are  meeting  their 


395 

own  cost,  through  a  system  of  robbing  other  mem- 
bers who  for  the  time  being  are  paying  in  excess 
of  their  legitimate  share  of  the  cost.  While  ad- 
mitting the  value  of  the  actual  experience  stand- 
ard, it  does  not  seem  that  one  of  its  legitimate  func- 
tions is  the  abrogation  of  the  State  standard,  nor 
does  it  appear  that  the  operation  of  the  two  are 
necessarily  antagonistic. 

The  safety  provision  should  be  twofold  under  a 
contract  such  as  I  have  aimed  to  describe.  All 
contracts  which  are  to  extend  for.  a  special  term  of 
years,  but  under  which  there  is  charged  a  net  pre- 
mium less  than  that  -called  for  by  the  Actuaries' 
Table  of  Mortality,  with  interest  at  4  per  cent,  for 
the  full  term,  should  contain  the  provision  for  re- 
adjustment of  such  net  premium  to  actual  facts  at 
a  date  at  least  as  early  as  the  end  of  the  term  which 
the  net  premium  actually  charged  covers  under  the 
State  standard.  Such  readjustment  may  be  fixed 
at  an  earlier  date,  and  under  some  forms  of  con- 
tracts it  would  be  hazardous  not  to  do  so. 

In  addition  to  this  there  should  be  the  provision 
for  meeting  any  actual  deficiency  in  the  reserve  as 
determined  under  the  contract  by  the  State  stan- 
dard, by  apportioning  the  same  among  the  insured 
by  said  standard.  Such  a  provision  under  such 
conditions  performs  the  function  that  paid  capital 
performs  in  the  proprietary  company,  and  that  the 


396 

admitted  excess  of  premium  collection  in  the  mu- 
tual company  is  designed  to  meet.  It  is  an  actual 
safety  provision  ;  not  a  danger-creating  clause.  An 
actuary  once  said  that  under  the  system  of  net 
valuation,  ''An  American  company  may  die,  but, 
unless  it  criminally  evades  the  law,  it  will  die 
solvent."  The  most  ill-appropriate  act  that  a  life 
insurance  company  can  commit  is  to  die,  and  to 
most  minds  it  would  seem  an  aggravation,  rather 
than  an  alleviation,  that  it  dies  solvent.  The  great 
aim  should  be  to  prevent  death.  The  assured  has 
bought,  not  simply  the  life  insurance  he  has 
already  had,  but,  as  well,  the  right  to  purchase 
other  insurance  in  the  future.  This  latter  it  is  that 
has  a  value  to  him  which,  too  often,  dollars  arid 
cents  will  not  measure.  Either  the  great  harm  of 
failure  lies  in  the  destruction  of  the  insurance- 
giving  function,  or  else  the  assessment  company 
that  closes  its  doors  with  ability  to  pay  accumu- 
lated death  claims,  and  so  pays  them,  entails  abso- 
lutely no  loss  upon  its  members.  Either  it  is  the 
destruction  of  the  insurance-granting  function  that 
is  the  loss  or  else  the  loss  is  that  of  a  percentage, 
more  or  less  great,  of  the  moneys  that  have  been 
paid  in  advance  for  insurance  yet  to  be  had.  If 
this  latter  is  the  measure  of  loss,  then  nothing 
could  be  more  false  than  the  claim  that  any  loss 
has  occurred  through  the  failure  of  companies  and 


397 

associations  operating  on  the  post-mortem  assess- 
ment plan,  and  which,  therefore,  have  collected 
nothing  in  advance. 

The  insurance  press  has  indulged  at  times  in 
something  of  hilarity  over  the  claims  of  assessment 
advocates  that  the  reserves  of  old-line  companies 
— so-called — are  a  source  of  danger.  Sometimes 
they  have  based  their  hilarity  on  the  clumsily 
worded  statements,  more  frequently,  perhaps,  on  a 
pretended  misunderstanding  of  their  opponents. 
The  menace  that  these  men  have  seen — and  they 
have  not  been  alone  in  seeing  it,  as  the  many  and 
earnest  papers  on  the  treatment  of  insolvent  com- 
panies coming  from  the  pens  of  some  of  our  most 
learned  American  and  English  actuaries  will  attest 
— is  in  the  vast  accumulations  held  to  offset  the  re- 
serve liabilities— accumulations  for  which  each  year 
is  proving  it  more  difficult  to  find  proper  invest- 
ments— investments  the  integrity  of  which  the  as- 
sured in  these  companies  must  insure,  at  the  peril 
of  their  future  insurance-granting  ability.  Assume 
that  on  the  31st  day  of  December,  1893,  every  bond, 
stock,  and  piece  of  real  estate  owned  or  loaned  on 
by  a  life  insurance  comj)any  of  this  country  had 
been  valued  at  the  cash  price  it  would  command  in 
the  market,  and  upon  such  valuation  the  solvency 
or  insolvency  of  these  companies  had  been  deter- 
mined. Is  any  man  here  to-day  prepared  to  measure 


398 

tlie  disaster  that  such  a  course  would  have  brought 
to  this  land  ?  To  such  a  course  was  there  lacking 
the  warrant  of  law ;  or  was  it  that  those  who  had 
in  charge  the  execution  of  that  law  were  wiser  than 
the  law  itself  and  executed  it  in  its  spirit  and  not 
its  letter  alone  ? 

You  will  yet  be  compelled  to  look  with  leniency 
on  the  doubt  which  will  assail  the  ordinary  mind 
as  to  the  exact  practical  infallibility  of  a  standard 
which  within  the  brief  term  of  forty  years  has 
called  for  the  recasting:  of  one  of  the  most  important 
factors  which  enter  into  the  determination  of  results 
upon  which  depends  the  meeting  of  contracts,  some 
of  which  may  extend  over  a  period  of  twice  that 
number  of  years— a  standard  concerning  which  its 
most  earnest  upholders  are  so  divided  on  this  one 
vital  point  that,  if  the  more  conservative  are  right, 
then  to  follow  the  less  conservative  is  to  move 
steadily  in  the  direction  of  failure.  Had  there  not 
existed  outside  the  law  the  ''  Safety  Clause"  of  an 
accumulating  surplus,  had  not  the  now  discarded 
interest  rate  of  four  and  one-half  per  cent,  been 
supplemented  by  a  standard  of  mortality  so  little 
exact  as  always  to  be  excessive,  how  could  your 
science  have  stood  the  test  of  the  already  impeached 
four  per  cent,  standard — to  say  nothing  of  three 
and  one-half  and  three,  which,  as  ''  coming  events," 
already  "  cast  their  shadows  before  "  ? 


399 

The  principles  which  I  have  aimed  to  set  forth  in 
this  paper  may  be  held  by  many  to  be  the  prin- 
ciples of  life  insurance  as  distinct  from  those  of 
assessment  life  insurance.  The  man  whose 
energy  has  made  possible  the  distinctive  features  of 
this  convention  is  on  record  that  "  There  is  but  one 
system  of  life  insurance."  Certainly,  it  does  not 
require  at  this  late  day  a  confession  of  faith  on  my 
part  in  this  tenet  of  his  creed.  So  far  as  it  has 
fallen  to  my  lot  to  teach,  I  have  sought  to  expound 
the  lesson  that,  at  the  foundation  of  all  true  life 
insurance,  rest  the  law  of  mortality  and  the  multi- 
plication table.  I  have  believed,  I  do  believe,  that 
methods  different  than  those  practiced  by  many  of 
our  even  great  companies  will  carry  better  into 
practice  these  laws,  will  better  elucidate  that  one 
system  ;  but  I  have  never  consciously  taught  that 
the  violation  of  law  will  produce  system  ;  that  the 
ignoring  of  the  laws  of  life  leads  away  from  the 
portals  of  death.  I  regard  with  wonder,  no  whit 
diminished  as  my  years  of  study  grow  in  number, 
the  achievements  of  a  half  century  in 'American 
life  insurance.  A  third  of  a  century  ago,  the  man 
who  would  have  predicted  such  results  from  the 
then  modest  beginnings,  would  have  been  regarded 
as  visionary  and  an  enthusiast.  So,  though  the 
assessment  method  should  disappear  with  the  day 
that  now  is,  the  record  of  its  achievements,  the  aid 


400 

and  comfort  that  it  has  brought  to  tens  of  thou- 
sands of  homes  in  the  land,  the  moderate  expense 
at  which  its  work  has  been  done,  the  wonderful 
educational  influence  which  it  has  had,  would  read 
like  a  fairy  tale.     Shortsighted  indeed  must  be  the 
man  who  can  set  against  this  record  the  tale  of  the 
disappointment  of   unfounded  hopes,  the  portion 
now  of  men  who  have  been  deceived  because  they 
have  been  ready  to  be  deceived,  and  declare  the 
balance  to  be  on  the  side  of  loss  !     Such  a  man 
reads  not  in  the  book  of  facts,  but  from  the  scroll 
of  prejudice  so  deep  ingrained  in  his  nature  that 
facts  have  no  meaning  for  him.     The  record  of  as- 
sessment life  insurance  is  a  part  of  the  history  of 
American  life  insurance,  and  no  matter  how  many 
may  be  its  dark  pages,  the  bright  ones  predominate, 
and  the  belief  which  the  assessment  movement  at- 
tests on  the  part  of  the  American  people  in  the  life 
insurance  principle  should  kindle  hope  in  the  heart 
of  everyone  who  believes  that  life  insurance  has  a 
work  to  perform  in  the  world  that  no  other  system 
ever  devised  or  that  can  be  devised,  can  perform. 
I  join  with  the  Insurance  Commissioner  of  Wis- 
consin in  the  declaration,   ''There  is  but  one  sys- 
tem of  life  insurance"  ;  and  to  that  declaration  I 
would  add,   that  system  is  so  broad,  it  so  com- 
pletely   embraces    the    needs    of    all    classes,   its 
possible  methods  of  development  are  so  varied  that 


401 

the  wise  man,  the  intelligent  legislator,  the  honest 
supervisor  will  make  it  his  study  to  shape  every 
method  to  conform  with  fundamental  laws,  rather 
than  to  confine  to  pre-ordained  channels  a  system 
of  which  only  a  reckless  or  an  ignorant  man  will 
declare  that  a  half  century  has  been  sufficient  to 
exhaust  its  possible  developments. 


LEGISLATIVE,  ACTUARIAL  AND  OFFICIAL 
TREATMENT. 

L.  G.  FOUSE  : 

(1)  In  the  domain  of  life  insurance,  the  word 
*' assessment"  is  variously  interpreted,  and  is 
oftentimes  employed  to  describe  a  practice  rather 
than  a  principle.  It  is,  therefore,  necessary  at  the 
outset,  in  the  treatment  of  this  subject,  to  define 
clearly  and  comprehensively  what  an  assessment 
is,  and  its  methodology  as  applied  to  life  insur- 
ance. Those  averse  to  it  on  account  of  early  prac- 
tices and  failures,  contend  that  assessment  in  life 
insurance  means  collecting  after  death,  or  sell- 
ing insurance  on  credit.  This  definition  being  er- 
roneous, not  in  accord  with  present  practice,  in 
conflict  with  the  laws  of  many  States,  and  the 


402 

method  contemplated  thereunder  being  admittedly 
unsafe  and  eventuallj'-  resulting  in  failure,  is  at 
once  dismissed  as  not  being  deserving  of  any  seri- 
ous consideration. 

James  Chisholm,  Fellow  of  the  Institute  of 
Actuaries,  defines  the  assessment  of  life  risks  to  be 
**the  fixing  the  price  of  assurance  for  each  in- 
dividual life." — Journal  of  Institute^  Yol.  XXV", 
p.  408. 

The  definition  given  by  Blackstone,  Burrell,  and 
the  highest  courts  of  some  of  our  States,  to  the 
effect  that  an  assessment  is  the  naming  by  an  au- 
thority of  an  amount  to  be  paid  in  exchange  for 
benefits,  in  contradistinction  to  an  amount  fixed  or 
regulated  by  law,  is  the  best  definition  of  the 
word  ''  assessment "  in  its  application  to  life  insur- 
ance, and  is  adopted  by  me  in  the  consideration  of 
this  subject. 

LEGISLATION. 

(2)  Any  authority,  corporate,  legislative,  or 
ofiicial,  which  is  charged  with  the  naming  of  the 
rate  to  be  paid  for  benefits  of  life  indemnity, 
should  be  required  to  show  very  clearly  on  what 
assumption  or  experience  the  rates  adopted  are 
based,  and  should  not  be  permitted  to  name  or 
adopt  them  at  haphazard.  While  there  is  great 
danger  in  the  circumscription  by  governmental  au- 


403 

thority,  because  the  limitations  are  fixed  and  not 
adapted  to  meet  changed  conditions,  as  I  shall  en- 
deavor to  show  later,  there  is  likewise  danger 
in  leaving  the  door  wide  open  for  adventurers  and 
schemers  to  take  advantage  of  the  prestige  and 
reputation  of  an  honorable  business  for  selfish  ends. 

(3)  Both  extremes  can  be  avoided,  and  a  middle 
course  pursued,  by  proper  legislative  action.  If 
the  promoters  of  a  company  were  required  at  the 
outset  to  give  substantial  evidence  of  good  faith  by 
depositing  with  the  State  a  reasonable  sum,  not 
prohibitory,  of  say  $25,000,  to  be  retained  by  the 
State  as  a  guarantee  fund  until  the  assets  of  the 
corporation  should  amount  to  at  least  $200,000, 
adventurers  and  schemers  would  find  assessment 
life  insurance  an  uninviting  field,  and  yet  en- 
couragement would  be  given  to  honest  enterprise 
in  the  formation  of  new  companies. 

(4)  No  charter  should  be  granted  by  any  State 
until  the  plans  on  which  the  corporation  intends 
to  operate  are  endorsed  by  a  competent  actuary, 
and  approved  in  writing  by  the  insurance  commis- 
sioner. It  should  be  provided,  that  after  such 
approval  there  should  be  no  reduction  in  premiums, 
except  by  way  of  dividends  or  earnings,  unless  ex- 
pressly authorized  by  the  commissioner  after  the  ap- 
proval of  such  reduction  by  a  competent  actuary. 

A  life  insurance  company  which  establishes  itself 


404 

on  correct  principles  (an  exceedingly  difficult  thing 
to  do,  because  of  the  great  competition),  may- 
be relied  upon  to  perpetuate  its  existence  by  the 
force  of  its  own  strength  and  management,  without 
governmental  interference. 

(5)  It  is  not  my  intention  to  discuss  at  any 
great  length  the  function  of  government  in  its 
dealings  with  life  insurance  corporations,  but,  for 
the  better  understanding  of  the  suggestions  herein 
made,  I  want  to  say,  that  a  valuation  made  by  gov- 
ernmental authority  from  data  furnished  by  the 
companies,  of  which  the  valuers  have  no  actual 
knowledge,  is,  in  my  opinion,  a  fraud  upon  the 
public  ;  it  lulls  the  public  into  the  belief  that  the 
State  exercises  some  control  over  the  manage- 
ment, or  is  in  some  way  responsible  for  the  carry- 
ing out  of  contracts,  which,  of  course,  is  not  the 
case.  There  should  be  no  shifting  of  responsibil- 
ity from  the  officers  and  directors  of  a  company  to 
the  officials  of  the  State,  who,  under  the  law,  are 
in  no  way  responsible  for  lack  of  knowledge,  error  of 
judgment,  incompetency,  and  the  like,  nor  does  the 
State  assume  any  responsibility  whatever  therefor. 
It  is  highly  important  then  that  the  legislative  treat- 
ment should  be  such  as  to  make  it  clear  to  the  in- 
sured and  the  insurer  that  the  guardianship  of  the 
State  does  not  in  a  material  degree  extend  beyond 
the  period  of  organization.     Thereafter,  the  mem- 


405 

bersof  the  organization  or  stockholders  must  govern 
themselves  according  to  the  by-laws  adopted,  and 
must  assume  all  the  responsibility  of  management 
and  of  perpetuating  the  existence  of  the  corporation. 
(6)  The  legislative  feature  which  has,  in  the  main, 
distinguished  assessment  from  the  other  forms  of 
life  insurance,  is,  that  companies  qualifying  under 
the  assessment  law  have  not  been  required  in  any 
State  until  recently  to  have  values  made  by  govern- 
mental authority.  An  effort  has  been  made  re- 
cently to  erect  some  standard  of  valuation  for 
assessment  life  insurance  on  the  line  of  the  present 
standard  of  legal  solvency  adopted  by  the  States. 
There  are  those  who  claim  that  what  is  generally 
known  as  the  legal  reserve  standard  should  by  law 
be  made  to  apply  to  assessment  life  companies. 
There  is  nothing  in  this  movement  in  the  interest 
of  the  insuring  public  to  commend  it ;  it  would  not 
only  work  a  hardship  in  many  cases,  but  in  others 
would  needlessly  wreck  the  comxDanies.  Why 
should  such  standard  be  extended  to  a  method  of 
insurance  to  which  it  does  not  apply  and  never  has 
applied,  when  respected  authorities  (being  repre- 
sentatives of  companies  to  which  it  has  always 
applied  since  its  adoption)  who  have  had  every  op- 
portunity of  studying  and  acquainting  themselves 
with  its  workings,  strongly  urge  and  advise  that  it 
be  at  least  modified  if  not  discontinued  ?    Permit 


406 

me  to  review  as  briefly  as  possible  the  expressed 
opinion  of  well-known  authorities  with  reference  to 
the  legal  standard  of  safety  adopted  by  the  States. 
(7)  The  subject  was  exhaustively  considered  and 
discussed  in  the  National  Insurance  Commission- 
ers' Convention,  held  in  1871.  The  Hon.  Elizur 
Wright,  author  of  the  net  valuation  system,  who 
admitted  that  it  owes  its  adoption  by  the  State 
more  to  good  luck  than  to  wisdom,  said  that  it  was 
not  the  intention  of  those  who  framed  the  law  to 
make  it  a  test  of  solvency,  although  it  was  so 
considered  by  the  public  at  large,  and  by  a  great 
many  insurance  men,  and  that  under  it  new  com- 
panies could  not  be  expected  to  get  into  successful 
operation.  Whatever  the  intention  of  those  who 
framed  the  law  may  have  been,  the  fact  remains, 
that  in  a  majority  of  the  States  without  the  allow- 
ance of  a  margin  of  any  kind  it  has  been  adopted 
and  recognized  as  a  legal  standard  of  safety.  For  ex- 
ample :  in  Pennsylvania,  the  law  provides  that  as 
soon  as  a  company  has  not  on  hand  the  net  value  of 
all  its  policies  in  force,  on  the  basis  of  the  actuaries' 
table  and  interest  at  4  per  cent.,  after  all  other 
debts  of  the  company  and  claims  against  it  have 
been  provided  for,  the  commissioner  shall  (1)  pub- 
lish that  the  '*  affairs  of  the  company  are  below  the 
standard  of  legal  safety  ;  "  (2)  stop  new  business  ; 
(3)  'immediately  institute  proceedings." 


407 

Mr.  Sheppard  Homans,  in  discussing  the  system 
of  net  valuation,  pointed  out  cases  in  which  it 
would  be  purely  fictitious  and  arbitrary,  and  said  : 

It  appears  to  me  that  the  function  of  the  State 
might  very  well  be  limited  to  the  exaction  of  evi- 
dence in  the  case  of  any  company,  that  the  finan- 
cial conditions  of  the  contracts  have  been  faithfully 
performed. 

Mr.  Fackler,  and  others  who  participated  in  the 
discussion,  agreed  that  net  valuation  is  not  a  test 
of  solvency,  and  that  in  many  cases  it  is  entirely 
fallacious. 

The  Hon .  Wm.  Barnes  said  : 

'*A  Procustean  standard,  I  might  call  it,  because 
it  is  so,  on  a  net  valuation  system  *  *  *  a 
company  under  our  statute  test  can  be  legally  in- 
solvent, and  actually  able,  in  a  business  point  of 
view,  to  pay  all  its  obligations  at  maturity,  *  *  * 
so  when  you  come  to  turn  over  a  life  company  into 
the  hands  of  a  receiver,  that  is  a  matter  on  which 
there  ought  to  be  a  great  deal  of  hesitation." — Na- 
tional Insurance  Commissioner  s\  Convention,  1871, 
p.  149-152. 

The  following  declaration  appears  in  said  pro- 
ceedings, page  170  : 

"The  public  seeking  insurance  should  have  the 
privilege  of  obtaining  it  at  its  actual  value,  without 
the  necessity,  except  at  their  pleasure,  of  paying 


408 

premiums  confessedly  greater  than  such  value,  and 
for  pecuniary  profit  becoming  co-partners  in  a  busi- 
ness which  they  can  with  difficulty  undertake  to 
direct." 

I  commend  this  declaration  to  this  convention 
and  the  public  generally,  which  ought  not  to  be 
compelled  by  law  to  make  a  deposit  for  insurance 
in  excess  of  its  present  and  future  cost  as  shown 
by  experience. 

Mr.  Walter  S.  Nichols,  in  his  admirable  paper 
presented  to  the  Second  International  Congress  of 
Actuaries,  held  in  London,  1898,  logically  points 
out  the  limitations,  inconsistencies,  and  shortcom- 
ings of  the  net  valuation  system,  which  he  declares 
is  neither  a  test  of  solvency,  nor  does  it  furnish  the 
proper  basis  for  the  retention  or  division  of  surplus. 

Members  of  the  Actuarial  Society  of  America,  as 
stated  by  Mr.  Fackler,  generally  admit  *'that  the 
unwise  and  hasty  legislation  of  several  States  con- 
cerning impairment  constitutes  one  of  the  greatest 
latent  dangers  to  the  cause  of  life  insurance." 
He  then  very  properly  directs  attention  to  the  fact 
that  **fine  weather  is  the  time  to  make  staunch 
arrangements  against  storm,"  and  that  '*the  legis- 
lation which  needlessly  wrecked  so  many  com- 
panies during  the  last  score  of  years,  was,  in  a  large 
degree,  the  product  of  ignorance,  haste,  and  pas- 
sion, and  we  should  now  endeavor  to  correct  the 


409 

mistakes  of  the  past  lest  they  bear  a  fresh  crop  of 
evil  in  the  future." 

Mr.  McClintock  is  on  record  as  saying,  "  Away 
with  the  system  so  inconsistent,  so  dangerous,  so 
utterly  stupid." 

Messrs.  Woolhouse  and  Neison,  of  London,  and 
Prof.  Pierce,  of  Harvard  College  (see  Mass.  Ins. 
Keport,  1860),  in  commenting  on  a  valuation  made 
by  the  examiners,  said  : 

*'  It  is  stated  that  their  computations  are  made 
on  the  '  Combined  Experience  or  Actuaries'  Rate 
of  Mortality.'  To  inexperienced  persons  and  to 
the  public  in  general  this  mode  of  proceeding 
would  appear  to  be  sanctioned  by  great  authority  ; 
but  what  are  the  real  facts  ?  There  is  really  no  such 
table  of  mortality  as  that  described,  it  is  a  mere  hy-. 
pothetical  and  fictitious  table,  and  is  not  based,  as  all 
reliable  tables  are,  upon  observations  on  lives,  but 
has  been  deduced  from  records  as  to  policies  only, 
in  which  the  number  of  lives  at  risk  was  entirely 
unknown  to  anyone  engaged  in  its  construction." 

To  the  well  known  authorities  who  have  con- 
demned the  standard  may  be  added  Mr.  Richard 
A.  McCurdy,  Mr.  Charlton  T.  Lewis,  Mr.  John  A. 
McCall,  and  others. 

(8)  The  potentiality  of  the  governmental  system 
of  valuation  was  never  proved  on  the  basis  of  scien- 
tific data,  but  its  weaknesses  have  always  been  per- 


410 

plexing  to  its  most  earnest  advocates.  Cumulative 
experience  has  magnified  its  deficiencies,  and  to- 
day we  find  arrayed  against  it  the  majority  of 
actuaries  and  expert  life  underwriters.  Ever- 
changing  economic  conditions,  which  in  their  turn 
develop  and  vitiate  the  factors  which  regulate  life 
insurance  values,  must  be  recognized  in  any  equit- 
able and  scientiHc  method  of  valuation.  A  review 
of  our  currency  system  will,  perhaps,  illustrate  as 
forcibly  as  anything  that  while  a  unit  of  value  may 
be  fixed,  it  cannot  be  maintained  unless  in  harmony 
with  the  law  of  supply  and  demand.  The  same  law 
of  flexibility  must  be  made  a  part  of  our  life  insur- 
ance system  if  justice  be  done  to  the  insurer  and 
insured.  We  need  only  go  back  a  few  months  to 
find  that  some  of  our  life  companies  lowered  their 
com  putative  rate  of  interest  for  proper  increment 
on  investments  and  reserves,  that  a  heavy  war  tax 
has  been  imposed  for  which  premium  rates  have 
not  provided,  and  that  our  mortality  rate  is  subject 
to  increase  through  the  uncertain  death-rate  of 
battle-field  and  pestilential  epidemics  of  camp  life. 
Is  any  scientific  mensuration  of  policy  values  trust- 
worthy and  equitable  as  a  test  of  solvency  which  is 
too  inflexible  to  recognize  future  contingencies, 
prospective  resources,  and  the  possibilities  result- 
ing from  variable  liabilities  of  life  companies  which 
are,   for  the  most  part,    postponed  far  into  the 


411 

future  ?  The  hypothetical  basis  of  the  legal  factors 
which  underlie  the  net  valuation  system  render 
such  recognition  absolutely  impossible.  It  cannot 
take  into  account  either  the  present  or  future  eco- 
nomic and  financial  conditions,  but  must  remain  on 
the  hard  and  fast  lines  laid  down  in  the  statute. 

(9)  It  is  the  pride  of  the  Anglo-Americans,  as  a 
people,  that  they  have  demonstrated  themselves 
capable  of  self-government.  The  spirit  of  self- 
government  should  be  fostered  and  encouraged  in 
all  the  affairs  of  life,  and  legislation  of  a  paternal 
character  should  be  avoided  as  much  as  possible. 

The  standard  of  legal  safety  erected  by  the  several 
States  applicable  to  what  are  known  as  legal  re- 
serve companies,  is  not  by  any  means  uniform.  A 
condition  which  constitutes  solvency  in  one  State, 
may  allow  a  liberal  margin  in  another. 

(10)  On  account  of  the  similarity  between  the 
assessment  method  advocated  by  myself,  and  what' 
is  known  as  the  British  method,  I  shall  cite  the 
expressed  opinions  with  reference  to  governmental 
valuation,  or  State  standard  of  solvency,  of  some 
of  the  leading  actuaries  and  underwriters  in  the 
mother  country  of  life  insurance. 

Mr.  Richard  Teece,  before  the  Institute  of  New 
South  Wales,  reported  in  the  Journal  of  the  Insti- 
tute of  Actuaries,  Yol.  XXY,  said : 

''We  who  are  accustomed  to  the  almost  perfect 


412 

liberality  of  the  life  policy,  look  with  astonishment 
on  the  conditions  with  which  the  contracts  of  Ameri- 
can companies  are  burdened." 

He  makes  a  comparison  between  American  and 
British  life  company  failures  as  to  the  comparative 
numbers  and  circumstances,  and  says  : 

''  British  companies  have  collapsed  as  the  result 
of  many  years  of  shameful  mismanagement,  but  the 
American  companies  receive  from  the  Superinten- 
dent certificates  of  solvency  year  by  year  up  to  the 
very  date  of  their  failure,  and  we  know  well  enough 
that  an  insolvent  life  company  is  not  the  mushroom 
growth  of  a  single  night,  but  the  development  of 
many  years  of  retrogression.  The  result  of  Ameri- 
can legislation  has  been  to  lull  the  public  to  sleep, 
to  lead  it  to  trust  implicitly  in  a  system  which  only 
pretended  to  give  security,  and  to  take  away  from 
the  people  the  incentive  to  observe,  to  examine,  to 
scrutinize  for  themselves.  Theoretically,  this  legis- 
lation is  based  on  sound  principles — practically,  it 
has  proved  to  be  rotten." 

He  does  not  claim  perfection  in  British  law  or 
methods,  but  shows  that  the  results  of  the  British , 
as  compared  with  those  of  the  American  method, 
have  been  most  satisfactory,  and  especially  since 
the  Life  Insurance  Company's  Act  of  1870.  In 
speaking  of  the  difference  between  said  Act  and 
the  American  laws,  he  says  : 


413 

"The  leading  principle  of  the  English  Act  is  in 
direct  opposition  to  that  to  which  I  have  alluded 
as  the  chief  characteristics  of  American  legislation. 
The  latter,  as  I  have  shown,  aimed  at  placing  infor- 
mation in  the  hands  of  a  State  official,  to  whom  the 
public  were  taught  to  look  for  protection.  The 
English  Act,  on  the  contrary,  aims  at  compelling 
the  companies  to  make  public  this  information,  and 
then  leaves  the  people  to  decide  for  themselves  as 
to  the  solvency  or  otherwise,  of  the  corporations. 
America,  in  effect,  declared  that  the  people  could 
not  be  trusted  to  discriminate  for  themselves. 
England,  on  the  contrary,  said,  give  the  people  the 
information  necessary  to  enable  them  to  judge,  and 
leave  everything  else  to  the  force  of  public  opinion, 
moulded  by  the  criticisms  of  a  free  and  unfettered 
press." 

The  Act  contains  provisions  for  dealing  with 
companies  which  may  become  insolvent ;  but  unlike 
the  American  acts  it  does  not  say  what  constitutes 
insolvency. 

Under  the  American  act,  as  I  have  said,  when  a 
company  is  found  unequal  to  the  standard  of  sol- 
vency laid  down,  it  is  put  straightway  into  the 
hands  of  a  receiver,  under  whose  care  it  passes 
during  some  years  through  an  ordeal  of  spoliation, 
and  finally  yields  either  nothing  at  all,  or,  at  the 
best,  very  homeopathic  dividends  to  the  policy- 


414 

holders.  Under  the  English  act,  it  is  in  the  power 
of  the  court,  instead  of  ordering  the  insolvent  cor- 
porations to  be  wound  up,  to  reduce  the  amounts 
of  the  policies,  and  to  make  provision  for  carrying 
the  company  on  in  such  a  way  that  there  shall  be 
no  unnecessary  waste  of  its  resources.  I  look  upon 
this  provision  as  a  most  valuable  one. 

Mr.  George  King,  author  of  the  text-books  of  the 
British  Institute  of  Actuaries  ( Journal  of  the 
Institute^  Yol.  XXIX)  presented  to  the  British 
Institute,  November  30,  1891,  a  most  valuable  paper 
on  legislation  affecting  life  insurance  companies^ 
in  which  he  contrasted  the  British  acts  of  1870- 
1872,  and  their  amendments,  with  American  legis- 
lation. A  few  extracts  will  suffice  to  get  the  drift 
of  his  views.  In  speaking  of  the  British  act,  he 
said  : 

**  In  fact,  FREEDOM  and  publicity  have  been  the 
foundations  on  which  the  insurance  superstructure 
in  this  country  has  been  bui]t." 

Mr.  King  asks  this  question  : 

"Do  the  public  derive  most  benefit  from  leaving 
the  companies  unfettered?  Or,  for  the  national 
welfare,  should  the  State  exercise  a  paternal 
authority  over  their  proceedings  ?  " 

To  enable  him  to  answer  the  question  intelli- 
gently, he  addressed  letters  of  inquiry  to  repre- 
sentative   American    underwriters,   such    as    CoL 


416 

Jacob  L.  Greene,  Mr.  Richard  A.  McCurdy,  Mr. 
John  A.  McGall,  and  others.  Col.  Greene  seems 
to  have  been  the  only  direct  champion  of  the  legal 
standard  of  safety,  and  to  my  mind  presents  a  most 
unfortunate  argument  in  its  favor.     He  says  : 

''  People  have  put  faith  in  supervision,  and 
CEASED  TO  WATCH  FOR  THEMSELVES,  and  that  faith 
has,  in  great  part,  contributed  to  the  rapid  devel- 
opment of  life  assurance  among  us,  and  to  the  pe- 
culiar character  of  that  development." 

Whenever  people  cease  to  watch  for  themselves, 
or  possess  a  blind  faith  in  anything,  there  is  always 
great  danger  of  disappointment  ;  but  the  statement 
made  by  Col.  Greene  is  undoubtedly  true  ;  it  is  the 
effect  that  paternal  legislation  and  supervision  to  a 
great  extent  has  had  on  the  American  people. 

Mr.  King,  like  Mr.  Teece,  compared  the  mor- 
tality of  British  and  American  life  offices,  and 
found  it  to  be  much  lower  in  the  former  than  in 
the  latter. 

The  following  extracts  from  Mr.  King's  paper 
are  to  the  point : 

'*  For  an  insolvent  company  to  fail  is  a  disaster  ; 
but  to  force  a  really  solvent  though  weak  one  into 
bankruptcy  produces,  perhaps,  a  greater  disaster 
still. 

*'  In  fact,  when  a  government  standard  of  sol- 
vency is  imposed,  on  the  one  hand  the  sense  of  re- 


416 

sponsibility  is  lost  by  the  officers,  and,  on  the 
other,  public  opinion  adopts  that  standard,  and 
asks  for  nothing  better. 

"All  the  circumstances  of  the  office  must  be  care- 
fully considered  in  determining  upon  the  basis  to 
be  adopted  (this  has  reference  to  valuation),  and 
for  the  government  to  insist  upon  one  uniform 
method,  entirely  irrespective  of  the  nature  of  the 
insurance  contracts,  expressed  or  implied,  to  be 
valued,  would  be  a  proceeding  in  the  last  degree 
mischievous  •»  *  *  the  official  standard  sub- 
stitutes dull  unformity  for  healthy  diversity.  We 
have  seen  that  it  does  not  tend  to  secure  stability, 
and  now  we  may  say,  that  it  does  not  possess 
any  other  advantages  *  *  *  the  statutory  test 
valuation  would  come  to  be  in  reality,  though  not 
in  name,  a  government  standard,  with  the  mis- 
chievous results  already  discussed.  •*  *  *  This 
great  legislative  activity  is  due  entirely  to  the  idea 
that  has  gained  complete  hold  of  the  American 
mind,  that  insurance  companies  require  super- 
vision, almost  as  though  their  officers  were  ticket- 
of -leave  men. 

'*  Persons  who  had  insured  on  the  strength  of  a 
government  officer's  certificate  in  an  office  that 
afterwards  became  insolvent,  would  have  grave 
cause  to  grumble,  and  in  justice  they  would 
have  a  claim  for  compensation  from   the    State. 


417 

Government  supervision,   therefore,  logically  im- 
plies government  guarantee." 

Mr.  King,  after  a  lengthy  and  exhaustive  review 
of  both  the  American  and  British  systems,  sup- 
ported by  citation  of  facts  and  opinions  of  others, 
says : 

*'  I  give,  after  a  long  and  careful  consideration  of 
the  subject,  my  vote  emphatically  in  favor  of  the 
British  system." 

Mr.  King's  latest  expression  on  the  subject  was 
before  the  International  Congress  of  Actuaries, 
held  in  London  in  May,  1898,  when  he  said : 

"  It  should  go  forth  that  the  opinion  of  the  con- 
gress was,  that  while  a  net  premium  valuation  was 
desirable,  it  should  not  be  insisted  on  as  a  test  of 
solvency.  To  insist  upon  such  a  test,  might  work 
a  vast  amount  of  mischief  and  inflict  cruelty  upon 
the  unfortunate  policy-holders.  To  compel  the 
liquidation  of  a  company  which  was  really  solvent, 
and  able  to  pay  its  way,  simply  because  it  did  not 
come  up  to  the  test  of  theoretical  perfection,  was 
very  undesirable." 

Dr.  T.  .B.  Sprague,  in  discussing  the  proper 
method  of  estimating  the  liability  of  a  life  com- 
pany, after  citing  three  typical  cases,  under  which 
the  net  premium  method  of  valuation  is  wholly  in- 
applicable, says : 

"  The  really  scientific  actuary  must  be  prepared 


418 

to  deal  with  each  case  according  to  its  own  merits, 
and  not  insist,  like  a  *  quack  doctor,  upon  ap- 
plying the  same  specific  in  all  cases  indiscrimi- 
nately."— Journal  Institute  of  Actuaries^  Vol. 
XV.,  p.  419. 

(11)  The  assessment  law  of  our  several  States 
could  be  undoubtedly  much  improved  and  short- 
ened. I  do  not  now,  and  never  have,  favored 
governmental  valuation — I  consider  it  a  farce  in  a 
pre-eminent  degree — but  do  favor  company  valua- 
tions as  a  guide  to  the  management,  and  incor- 
porating in  the  department  blanks  for  annual 
statements  policy  schedules,  calling  for  sufficient 
information  to  enable  any  actuary,  as  well  as  the 
departments,  to  check  the  valuations  made  by  the 
oflBlcers  of  the  several  companies.  If  such  schedules 
were  required  of  all  companies  it  would  result 
in  discussions  and  comparisons,  which  would  en- 
lighten the  insuring  public,  and,  in  the  end,  would 
be  for  the  betterment  of  the  business. 

(12)  Any  one  who  examines  carefully  the  assess- 
ment laws  of  the  several  States  will  find  that  in 
many  respects  they  are  framed  upon  and  conform 
to  the  principles  of  the  British  law. 

In  all  the  principal  States  every  company  is 
required,  as  a  condition  precedent  to  obtaining  a 
license,  to  show  that  it  has  for  the  preceding 
twelve  months  paid  its  policies  in  full,  and  that  it 


419 

has  the  ability  to  do  so  in  the  future,  and  a  further 
requirement  of  the  law  is,  that  it  must  carry  out  its 
contracts  with  members  in  good  faith.  If  a  com- 
pany cannot  satisfy  the  commissioner  of  insurance 
that  it  has  the  ability  to  pay  its  policies  in  full,  and 
that  it  is  carrying  out  its  contracts  with  members 
in  good  faith,  which  means  that  either  in  its  rates 
or  accumulation  it  must  make  provision  for  the 
future  as  well  as  the  present,  he  is  empowered  to 
take  the  company  into  court,  and  compel  it  to 
show  cause  why  its  officers  should  not  be  re- 
moved, and  the  company's  method  reconstructed 
on  a  proper  basis.  This  most  excellent  provision 
of  the  law  has  been  ignored  ;  I  do  not  know  of  a 
single  instance  where  advantage  has  been  taken  of 
it.  On  the  other  hand,  many  commissioners  in 
their  reports  are  calling  for  more  legislation,  more 
paternalism,  more  statutory  declaration  of  what 
shall  and  shall  not  be,  so  that  the  companies  may 
have  less  exercise  of  freedom  and  liberty,  and  the 
commissioners  less  opportunity  for  the  exercise  of 
official  skill  and  judgment.  If  solvency  be  deter- 
mined by  the  hard  and  fast  lines  of  legislative 
enactment,  instead  of  a  company's  ability  to  carry 
out  its  contracts  with  members  in  good  faith, 
the  indemnity  or  protection  of  the  latter  may  be 
wantonly  destroyed. 
(13)  I  contend  that  just  as  long  as  a  company 


420 

once  fully  established  is  in  a  position,  on  the  basis 
of  its  own  experience,  to  discharge  its  present  and 
future  obligations,  it  is  a  solvent  institution,  no 
matter  what  may  be  the  provision  of  the  law.  It 
therefore,  resolves  itself  merely  Into  a  question  of 
compiling  the  experience,  constructing  the  proper 
tables,  and  applying  them  to  the  insurance  liabili- 
ty. If  there  be  any  hardship  about  it,  or  anything 
complicated,  I  must  confess  my  inability  to  see  it. 
The  whole  proposition  rests  simply  on  justice. 

(14)  In  the  absence  of  governmental  responsi- 
bility, supervision  should  be  restricted  to  the  or- 
ganization of  new  companies,  included  the  adop: 
tion  and  maintenance  of  proper  rates,  the  granting 
of  license,  the  execution  of  laws,  the  compilation 
and  publication  of  reports,  and  to  examinations 
made  by  and  at  the  expense  of  the  State,  which 
should  have  in  its  employ  an  actuary  or  examiner 
of  known  ability,  whose  appointment  should  not  be 
subject  to  political  change  or  influence,  but  made 
wholly  on  merit  after  competitive  examination. 
It  should  by  law  be  made  a  misdemeanor,  punish^ 
able  both  by  fine  and  imprisonment,  for  such  actu- 
ary or  examiner,  after  accepting  the  position,  to  be 
directly  or  indirectly  connected  with  any  life  insur? 
ance  company  as  consulting  actuary,  or  in  any 
other  capacity ;  he  should  be  kept  tree  and  inde- 
pendent of  all  company  influences. 


421 

The  time  of  making  such  examinations  should 
be  left  to  the  discretion  of  the  commissioner,  but 
in  the  event  of  unfavorable  criticism  or  charges, 
the  corporation  should  be  given  the  right  to  demand 
an  examination. 

ACTUARIAL. 

(15)  Whenever,  in  the  discretion  of  corporate 
authority,  a  rate  of  premium  is  named  or  stipulated 
in  excess  of  the  natural  cost,  as  determined  by  the 
mortality  tables,  a  mathematical  reserve  must  be  of 
necessity  contemplated  for  some  purpose,  and, 
therefore,  actuarial  treatment  becomes  an  import- 
ant factor. 

The  assessment  principle  is,  in  the  concrete,  op- 
posed to  maintaining  an  individual  policy  liability, 
unless  the  amount  so  set  apart  has  been  collected 
for  a  specific  purpose  and  its  use  is  postponed  far 
into  the  future  and  does  not  form  an  essential  part 
of  the  current  insurance  fund.  Insurance  cannot 
be  carried  on  without  aggregate  and  average. 

(16)  An  anomaly,  to  which  I  have  never  been 
able  to  reconcile  myself,  is  to  employ  aggregate 
and  average  in  the  computation  of  premiums,  and 
then  immediately  nullify  them  by  establishing  an 
individual  policy  liability,  which  both  by  law  and 
practice  has  become  little  less  than  a  bank  deposit. 
When  a  policy  is  credited  with  a  reserve,  the  same 


422 

becomes  a  liability  of  the  company  ;  and  the  indi- 
vidual ownership  of  the  reserve,  which  diminishes 
the  insurance,  is  recognized  almost  as  much  as  it 
would  be  if  the  deposit  had  been  made  in  an  inde- 
pendent or  separate  financial  institution.  The  in- 
sured is  usually  given  options,  which  enable  him 
either  to  withdraw  the  cash  or  convert  the  same 
into  paid-up  insurance,  as  it  may  best  suit  his  con- 
venience or  purpose  ;  hence  this  is  individualizing, 
and  is  opposed  to  the  basis  of  aggregate  and  aver- 
age upon  which  insurance  is  founded.  I  hold, 
therefore,  as  a  distinctive  feature  of  assessment  in- 
surance, that  unless  the  money  be  collected  for  a 
special  purpose,  the  mathematical  reserve  should 
be  held  as  a  common  trust  fund,  in  which  the  in- 
terest of  the  existing  members  is  undivided.  A 
retiring  member,  if  his  contract  so  provides,  may 
withdraw  his  equitable  share  of  the  fund  after  de- 
ducting a  surrender  charge  equal  to  from  10  to  15 
per  cent,  of  the  present  worth  of  the  future  defi- 
ciency of  the  premium.  While  the  true  qx  com- 
piled from  insured  lives  is  supposed  to  cover  the 
selection  exercised  by  the  insured,  the  surrender 
charges  usually  made  are  both  inadequate  and  in- 
equitable, as  evidenced  by  the  fact  that  the  average 
death  loss  is  from  one  hundred  to  five  hundred 
dollars  in  excess  of  the  average  amount  of  existing 
policies. 


OF    TH£ 

UNIVERSITY 

Of 


423 


(17)  The  amount  of  the  mathematical  reserve 
required  can  be  determined  alone  by  tbe  terms  of 
the  policy  contract.  If  the  premium  rates  are 
based  on  actual  insurance  experience,  instead  of 
the  hypothetical  mortality  tables,  then  the  com- 
pany, of  necessity,  maintains  a  mathematical  re- 
serve, which  at  all  times  must  represent  the  present 
worth  of  the  future  deficiency  of  the  assessed  or 
stipulated  premiums.  The  valuation  to  be  made 
from  time  to  time  to  determine  the  sufficiency  of 
the  reserve  and  of  the  assessed  premium  can  be 
made  by  the  group  method,  and  the  result  will  be 
approximately  correct.  For  this  purpose  valuation 
tables,  with  interest  assumed  on  a  conservative 
basis,  should  be  constructed  on  well  authenticated 
insurance  experience,  and  these  should  be  used  by 
the  several  insurance  departments  as  a  guide  and 
for  the  purpose  of  comparison.  Every  company, 
however,  should  construct  valuation  tables  from 
its  own  experience  at  least  once  every  five  years, 
and  its  mathematical  reserve  at  no  time  should  be 
permitted  to  fall  below  the  requirement  of  its  own 
experience.  When  it  does,  the  deficit  must  either 
be  cured  by  special  assessment  or  by  correspond- 
ingly scaling  the  insurance. 

(18)  It  will  doubtless  be  contended  that  the  pres- 
ent ''standard  of  legal  safety"  adopted  by  the 
several  States  answers  every  purpose,  and  there  is 


424 

no  need  of  recognizing  any  other  standard.  To 
this  I  reply  that  assessment  insurance  in  its  varied 
forms  owes  its  existence  in  part  to  a  pronounced 
opposition  by  a  large  number  of  the  intelligent 
citizens  of  the  country  to  the  inflexible  provisions 
of  the  standard  adopted  by  the  State.  This  opposi- 
tion culminated  in  the  legislative  enactments  by 
which  companies  under  the  numerous  assessment 
methods  were  exempted  from  the  State  standard. 
Probably  three  million  citizens  of  the  TTnited  States 
hold  policies  or  certificates  of  insurance  to  which 
the  State  standard  does  not  apply.  It  is  not  neces- 
sary to  further  discuss  why  there  should  be  opposi- 
tion to  the  standard  adopted  by  the  States.  It  is 
only  necessary  to  state  the  self-evident  facts,  that 
the  inflexible  State  standard  has  been,  and  is  liable 
in  the  future  to  be,  in  conflict  with  the  actual, 
variable  conditions,  and  that  it  increases  the  ac- 
cumulation element  over  a  third  more  than  insur- 
ance experience  has  demonstrated  to  be  necessary. 
These  are  not  mere  statements,  but  facts  suscepti- 
ble of  proof.  I  claim,  therefore,  that  under  proper 
treatment  life  insurance  can  be  furnished  with  a 
greater  degree  of  safety  than  under  the  State  stand- 
ard, and  at  a  cost  materially  below  the  standard  pre- 
mium charge.  It  is  true,  that  under  the  State 
standard,  the  excessive  premiums  may  be  returned 
in  dividends,  but  it  is  likewise  true,  that  the  inflex- 


425 

ibility,  and  gross  or  excessive  payments,  still  con- 
tinue. In  other  words,  the  original  outlay  and  the 
reserve  maintained  are  much  greater  in  the  aggre- 
gate than  experience  indicates  to  be  necessary. 

(19)  A  pertinent  inquiry  which  naturally  fol- 
io ws^  is,  what  then  is  necessary,  and  how  shall  the 
knowledge  of  it  be  acquired  ?  Just  here  is  where 
actuarial  treatment  becomes  of  the  greatest  im- 
portance. There  are  various  processes  of  treating 
original  data  ;  but  that  process  which  does  the 
least  violence  to  the  natural  and  actual  results  is 
undoubtedly  the  best. 

In  the  construction  of  ordinary  mortality  tables, 
the  natural  conditions  are  eliminated,  the  exposures 
are  taken  at  the  attained  age,  and  for  the  purpose 
of  a  smooth  graduation,  are  artificially  treated,  so 
that  they  do  not  represent,  but  merely  approxi- 
mate, the  natural  law  and  conditions.  It  is  true, 
that  the  common  difference  may  be  almost  nil,  and 
yet  violence  be  done  to  the  natural  law.  If  the 
data  be  grouped  according  to  age  at  entry,  and 
years  of  exposure,  you  get  nearer  to  the  natural 
conditions,  and  have  less  occasion  for  lapsing,  and 
if  the  discontinued  under  non-forfeitable  policies, 
instead  of  deaths,  be  employed  in  the  discounting, 
the  result  will  represent  the  true  cost  and  actual 
experience. 

(20)  For  the  purpose  of  illustrating  the  differ- 


426 

ence  between  the  actual  and  hypothetical,  I  caused 
two  methods  of  valuation  to  be  applied  to  the 
policy  data  of  The  Fidelity  Mutual  Life  Associa- 
tion. 

The  one  assumed  that  the  association  collected 
net  premiums  and  maintained  a  reserve  according 
to  the  actuaries'  or  combined  experience  table  of 
mortality,  and  interest  at  4  per  cent.  This  method 
called  for  a  reserve  of  $1,840,292. 

The  other  method  assumed  nothing,  except  inter- 
est was  taken  at  4  per  cent.,  which,  on  an  average, 
is  about  1  per  cent,  less  than  the  actual  earnings  ; 
but  the  valuation  was  made  on  the  basis  of  its  net 
premiums,  and  its  own  experience  extended  after 
the  eighteenth  year  by  the  thirty  American  office 
experience,  according  to  age  of  entry  and  policy 
years.  This  method  called  for  a  reserve  of 
$1,072,181.28.  Negative  values  were  ignored.  The 
difference  in  the  two  valuations  amounts  to 
$768,110.72 ;  in  other  words,  the  accumulation 
required  under  the  actual  conditions  is  about  41 
per  cent,  less  than  is  required  under  the  hypotheti- 
cal basis  under  like  contracts  or  policy  conditions. 
This  difference  does  not  necessarily  imply  any  dif- 
ference in  the  actual  cost  of  insurance.  Under  the 
first  or  hypothetical  method,  it  is  possible  for  a 
company  to  return  by  way  of  dividends  the  exces- 
sive accumulation  of  $768,110.72  ;  but  my  contention 


.427 

is,  that  when  a  company  accamulates  what  all  ex- 
perience shows  to  be  necessary,  and  incorporates  a 
safety  clause  in  its  policies,  giving  it  the  right  to 
increase  the  assets,  or  diminish  the  insurance  lia- 
bility, that  there  is  no  actual  necessity  of  collect- 
ing premiums  on  such  a  hypothetical  basis.  This 
matter  was  admirably  put  by  the  committee,  as 
reported  in  the  proceedings  of  the  commissioners' 
convention  in  1871.  It  was  declared  that  the 
public  should  have  the  privilege  of  obtaining 
insurance  at  its  actual  value,  that  the  paying  of 
premiums  confessedly  greater  than  such  value 
should  he  at  their  pleasure,  and  that  they  should 
not  be  compelled  to  become  "  copartners  in  a  busi- 
ness which  they  can  with  difficulty  undertake  to 
direct." 

(21)  Under  the  experience  method  of  valuation, 
with  its  correlative  premiums,  the  probable  savings 
and  gains  are  anticipated,  and  the  premiums  are 
correspondingly  reduced.  It,  however,  must  be 
clearly  and  distinctly  understood  that  this  method 
of  valuation  and  constructing  premiums  contem- 
plates a  safety  clause  or  provision  in  the  policy 
similar  to  the  British  statute,  which,  in  the  event 
of  impairment  of  the  reserve,  authorizes  a  propor- 
tionate scaling  of  the  insurance  liability.  There  is 
absolutely  no  escape  from  paying  the  actual  cost 
of  insurance,   whether  it  be  the  hypothetical  or 


428 

experience  method ;  it  is  merely  a  question  of  busi- 
ness policy  and  convenience  to  the  insured,  as  to 
whether  he  can  pay  $30  as  readily  as  $20  to  protect 
his  dependents.  If  he  can,  he  will  probably  accept 
the  hypothetical  method,  and  the  chance  of  reduc- 
tion by  way  of  dividends,  so  as  to  avoid  the  possi- 
bility either  of  an  increase  in  cost  or  scaling  of 
indemnity.  On  the  other  hand,  if  the  reduction 
in  premium  be  an  object  to  him,  he  very  properly 
may  conclude  that  the  variation  in  the  cost  of 
insurance  has  been  so  slight  that  the  probability 
of  either  an  increase  in  cost  or  diminution  in 
indemnity  is  so  remote  that  he  will  prefer  to  retain 
the  one-third  of  the  premium  for  the  current  sup- 
port of  his  family  and  to  help  him  along  in  his 
business  interests. 

(22)  In  the  employment  of  the  experience 
method,  recourse  must  be  had  at  the  outset  to 
the  most  extensive  data  available,  but  after  a  com- 
pany  has  say  $75,000,000,  or  better  $100,000,000. 
insurance  in  force,  and  has  been  in  business  about 
twenty  years,  it  may  with  safety  have  recourse  to 
its  own  experience,  by  which  it  should  thereafter 
be  guided  in  the  determination  of  values. 

Premiums  and  values  based  on  the  actual  expe- 
rience of  the  thirty  American  offices,  grouped  ac- 
cording to  age  at  entry,  if  no  surrender  values  are 
contemplated,  would  afford  a  conservative  starting 


429 

point  for  a  new  company.  When  the  premiums 
are  discounted  by  the  discontinued  as  well  as 
deaths,  then  no  surrender  values  can  be  paid.  The 
insured  obtains,  by  way  of  reduction  in  premium, 
the  full  equivalent  of  paid-up  values.  If  such  ex- 
perience be  employed  at  the  outset  or  beginning  of 
a  company,  then  values  of  its  own  experience,  as 
soon  as  it  affords  a  good  average,  should  be  substi- 
tuted. No  company  which  undertakes  to  maintain 
a  level  rate  can  carry  out  its  contracts  with  mem- 
bers in  good  faith  unless  the  funds  safely  invested 
are  at  all  times  equal  to  the  present  worth  of  the 
future  deficiencies  according  to  its  own  experience, 
whether  such  experience  be  above  or  below  the 
standard  tables.  I  contend  that  it  is  already  a  re- 
quirement of  the  assessment  laws  of  nearly  every 
State  that  such  a  fund  should  be  maintained,  and 
that  it  is  the  duty  of  every  association  to  deter- 
mine and  maintain  values  and  premium  rates  ac 
cording  to  its  own  experience. 

(23)  Actuarial  considerations  do  not  end  with  the 
net  insurance  premium.  The  expense  factor  is  one 
which  is  too  often  neglected.  Mr.  Walter  S.  Nichols, 
in  his  paper  presented  to  the  Second  International 
Congress  of  Actuaries,  very  aptly  and  properly  says; 

"  The  paramount  legal  obligation  of  a  company  is 
to  perpetuate  its  existence  until  its  purposes  have 
been  accomplished.     It  justifies   the  retention  of 


430 

surplus  when  needed,  even  though  equities  may- 
be disturbed.  It  exacts  of  a  young  company  such 
expenditures  of  its  resources  for  new  business  with- 
in the  limits  of  safety  as  may  be  needed  to  secure  a 
sound  average,  and  requires  all  companies  within 
those  same  limits  to  maintain  whatever  member- 
ship is  required  to  carry  out  their  purposes." 

The  mad  race  for  business  in  which  every  com- 
pany, if  it  would  live,  must  take  some  part,  the  vari- 
ous devices  for  making  corporations  pay  tribute  or 
penalty  to  the  State,  the  press,  individuals,  lawyers 
and  blackmailers,  for  continuing  existence,  are 
becoming  a  menace,  and  result  in  materially  in- 
creasing the  cost  of  management.  While  much  has 
been  said  by  those  who  know  better  about  the  exces- 
sive cost  of  management  in  assessment  companies, 
the  fact  remains  that  they  as  a  class  have  not 
made  proper  provision  to  defray  the  expense  of 
management.  The  urgency  and  need  of  reform  in 
this  particular  led  the  companies  to  the  other  ex- 
treme ;  they  undertook  for  one  or  two  dollars  to 
do  what  ordinarily  under  careful  management  re- 
quires six  dollars.  Comparisons  have  been  made 
in  support  of  apparent  extravagances,  of  ratio  of 
expense  to  losses  paid,  which  is  worse  than  mis- 
leading, and  is  always  unjust  when  applied  to  new 
organizations,  or  organizations  that  have  not 
reached  a  normal  death  rate. 


431 

Mr.  Wm.  D.  Whiting  presented  to  the  Actua- 
rial Society  of  America,  at  its  April  meeting,  an 
able  paper  on  ''Provision  for  and  Distribution 
OF  Expense."  He  fully  recognized  the  difficulty 
of  presenting  any  fixed  formula  that  will  apply  to 
the  variable  conditions.  The  following  is  the  rule 
which  he  gives  as  the  probable  cost  of  manage- 
ment : 

''  1st.  New  Business.  80  per  cent,  of  the  first 
year's  premiums,  to  cover  all  expenses  incident  to 
securing  new  business. 

2d.  Collection.  10  per  cent,  of  renewal  pre- 
miums, to  cover  collection,  renewal  commissions, 
taxes,  etc. 

3rd.  Settlement.  IJ  per  cent,  of  the  face  of 
death  claims,  to  cover  investigating  and  resisting 
claims. 

4th.  Investments.  ^  of  1  per  cent,  to  cover 
taxes,  handling  of  investments,  etc. 

5th.  General.  $1.00  per  $1,000  insurance  an 
nually,  to  cover  the  general  expenses  not  compre- 
hended in  the  other  items." 

He  evidently  based  his  formula  on  the  experi- 
ence of  companies  which  have  a  very  large  amount 
of  business  in  force,  that  have  not  even  a  vestige 
of  foundation  expenses  left.  I  find  that  when  his 
formula  is  applied  to  the  most  conservatively 
managed  of  the  large  companies,  the   actual   re- 


432 

suits  conform  nearly  to  the  expected.  It  is  a  fact 
too  well  known  to  require  elaboration,  that  few  of 
the  expenses  increase  in  proportion  as  the  business 
increases  ;  that  most  all  the  smaller  companies 
could  with  their  present  plant  increase  their  busi- 
ness from  two  to  ten  fold,  without  materially  in- 
creasing any  of  the  expense  factors,  except  that 
which  relates  to  the  getting  of  new  business. 

Mr.  Whiting's  formula  could  not  be  applied, 
without  some  modification,  to  companies  which  do 
a  pure  insurance  business,  not  mixed  with  invest- 
ment. The  premiums  under  pure  insurance  are 
much  less  (although  management  expense  is  about 
the  same)  than  when  combined  with  investment, 
and,  therefore,  the  percentage  mentioned  in  the 
formula  would  produce  less.  The  average  annual 
premium  of  companies  doing  a  mixed  business  is 
about  $38  per  $1,000,  while  in  companies  doing  a 
pure  insurance  business  it  will  probably  not  ex- 
ceed $25  per  $1,000.  Therefore,  to  place  the  com- 
panies doing  a  pure  insurance  business  on  the 
same  basis  as  companies  doing  a  mixed  business, 
it  would  be  necessary  to  increase  the  premium  per- 
centage given  in  Mr.  Whiting's  formula  52  per  cent. 
Other  items  of  expense  would  not  be  affected. 

(24)  In  the  consideration  of  the  proper  assessr 
ment  or  distribution  of  expense,  companies  should 
be  divided  into  three  classes  : 


433 

The  first  class,  with  less  than  $100,000,000  insur- 
ance in  force,  will  require  90  per  cent,  of  the  first 
year's  premiums,  and  not  less  than  15  per  cent,  of 
the  renewal  premiums,  and  $2  per  $1,000  annually, 
instead  of  $1,  for  general  expenses. 

The  second  class,  having  from  $100,000,000  to 
$500,000,000  insurance  in  force,  could  approxi- 
mately meet  expenses  with  the  provision  Mr. 
Whiting's  formula  would  make,  although  as  a 
factor  of  safety  I  would  recommend,  on  renewal 
premiums,  a  change  from  10  to  12^  per  cent.,  and 
on  general  expense  from  $1  to  $1.50  per  $1,000  an» 
nually. 

The  third  class,  having  $500,000,000  insurance  in 
force,  and  upwards,  may  be  said  to  be  fully  grown, 
to  have  had  every  opportunity  to  have  their  meth- 
ods and  working  force  as  nearly  perfect  as  they 
can  be  made,  and  to  be  in  a  position  to  take  the 
advantage  which  a  large  volume  of  business  gives 
in  reducing  the  expense  ratio.  Such  companies 
should  require  less  fuel,  less  steam  in  securing  new 
business,  and  should  cover  the  first  item  with  70 
per  cent.,  the  second  with  8  per  cent.,  while  in  the 
third,  fourth  and  fifth  items  I  do  not  believe  a  re- 
duction could  be  effected  without  doing  injury  to 
the  service  and  the  business. 

This  grading  of  expense  will  not  necessarily  oper- 
ate to  the  disadvantage  of  a  new  company,  for  the 


434 

reason  that  the  larger  expense  of  a  new  company 
is  fully  offset  by  its  larger  mortality  savings,  so 
that  the  aggregate  cost  of  insurance  in  the  new 
company  will  not  be  greater,  although  the  expense 
element  is  greater,  than  in  an  old-established  com- 
pany which  has  attained  its  maximum  mortality. 

On  account  of  the  first  year's  premium  being 
practically  employed  in  defraying  the  cost  of  ob- 
taining new  business,  the  valuations,  whether  made 
according  to  the  hypothetical  or  experience  method, 
should  be  based  on  the  age  ensuing  the  age  the 
year  of  entry. 

OFFICIAL. 

(25)  The  official  treatment  must  of  necessity  be 
governed  by  the  laws  and  actuarial  conditions.  It 
is  undoubtedly  true  that  there  have  been  too  much 
laxity  and  generalizing  both  in  the  legislative  and 
official  treatment  of  assessment  insurance  to  bring 
about  a  healthy  actuarial  condition.  There  has 
been  abundant  criticism,  the  prefatories  of  the 
official  reports  of  some  of  our  insurance  depart- 
ments abounding  with  general  criticisms  and  de- 
nunciations of  assessment  insurance,  even  failing 
to  recognize  the  good  there  is  in  it,  and  the  possi- 
bility of  a  wholesome  development. 

No  plan  or  system  of  life  insurance  can  be  wholly 
measured  or  condemned  by  past  failures,  but  im- 


435 

portant  lessons  may  be  learned  from  them.  Fail- 
ures under  any  and  all  methods  have  occurred  in 
the  past,  and  will,  no  doubt,  continue  to  occur  in 
the  future.  The  proper  official  course  is  to  study 
the  causes  of  failures,  and  instead  of  resorting  to 
wholesale   denunciations,   to  the  prejudice    of 

EXISTING  CORPORATIONS  OF  THE  SAME  CLASS,  officials 

should  be  very  careful  to  ascertain  the  true  causes, 
point  them  out,  and  suggest  remedies  for  them,  so 
that  if  any  of  the  existing  corporations  are  subject 
to  the  mistakes  made  by  the  failing  concerns,  they 
will  not  be  without  suggestions  of  remedies.  It 
may  be  said  that  officials  are  not  necessarily  ex- 
perts, and  that  the  definite  pointing  out  of  causes 
of  failure  and  suggesting  remedies  therefor,  are 
beyond  their  knowledge,  experience,  and  in  some 
instances  ability.  This  may  be  true,  but  as  a  class 
they  are  men  of  intelligence,  of  earnest,  honest  en- 
deavor, and  good  judgment.  They  can  readily  ob- 
tain written  opinions  from  persons  who  are  recog- 
nized as  experts,  as  to  cause  of  failure  of  an  in- 
dividual company,  and  an  outline  of  business 
course  under  the  company's  method  that  would 
have  prevented  it.  By  getting  tlie  opinions  of 
several  experts,  together  with  the  possession  of  the 
data  available  to  them,  officials,  whether  insurance 
experts  or  not,  would  have  no  difficulty  in  reaching 
an  approximately  correct  conclusion. 


436 

The  official  who  cannot  see  any  good  in  assess- 
ment insurance,  or  who  is  anxious  to  circumscribe 
it  so  as  to  render  it  impracticable,  has  not  given 
the  subject  thorough  and  impartial  consideration. 
Almost  without  exception  an  analysis  of  his  in- 
formation would  disclose  the  fact  that  his  opinions 
are  due  to  having  accepted  data  from  prejudiced 
sources.  A  business  created  and  sanctioned  by 
authority  of  law,  in  which  no  less  than  three 
million  citizens  of  the  United  States  have  a  direct 
pecuniary  interest,  is  entitled  to  fair,  frank,  im- 
partial, official  treatment.  It  is  conceded  now, 
and  always  has  been,  by  experienced  under- 
writers, that  post-mortem  assessments  foster  dead- 
heads, encourage  a  tremendous  selection  against 
the  corporation  when  normal  mortality  is  reached, 
thus  in  time  ending  in  failure.  This  has  been 
called  a  ''rope  of  sand,"  "standing  on  nothing 
and  hanging  by  nothing,"  in  some  official  reports, 
but  these  same  reports  never  ventured  to  inform 
the  public  what  was  needed  to  make  it  a  substan- 
tial hemp  rope  of  irresistible  fibre  and  inherent 
strength.  The  remedy  is  very  simple,  and  no  in- 
telligent actuary,  or  honest,  practical  underwriter 
will,  for  a  moment,  dispute  it. 

(26)  The  post-mortem  assessment  plan  (which  I 
never  advocated,  and  do  not  now)  can  be  made  per- 
fectly safe  by  requiring  the  insured  to  make  a  de- 


437 

posit  in  advance,  to  be  held  by  the  corporation  as 
a  common  trust  fund,  of  a  sum  equal  to  10  per 
cent,  of  the  single  net  premium  at  the  age  of  entry, 
on  the  basis  of  the  actuaries'  table,  such  deposit 
to  be  held  as  security  for  post-mortem  payments, 
to  compensate  the  corporation  for  the  withdrawal 
of  healthy  members,  and  to  pay  losses,  if  any,  in 
excess  of  the  tabular  cost.  If  such  advance  de- 
posits were  made,  then  insurance  could  be  sold  on 
sixty  or  ninety  days'  credit,  or  post-mortem  method, 
with  perfect  safety,  provided,  always,  that  the  after- 
death  assessments  are  based  on  the  true  or  attained 
age  of  the  insured  at  the  time  of  payment. 

Who  can  tell  what  the  effect  on  the  business 
would  have  been  had  the  officials  of  the  insurance 
departments  fifteen  or  twenty  years  ago,  when  as- 
sessment companies,  were  organized  almost  without 
number,  united  in  pointing  out  how  they  should 
be  organized  and  conducted,  rather  than  in  de- 
nouncing and  condemning  them.  Indeed,  I  have 
heard  some  go  so  far  as  to  say  that  it  is  not  fair  to 
the  companies  required  to  maintain  the  legal  re- 
serve, to  permit  the  existence  of  companies  of  any 
other  class.  Such  officials  are  open  to  the  sus- 
picion of  having  a  greater  interest  in  a  certain 
class  of  insurers  than  they  have  in  the  insured, 
whom  they  are  supposed  to  represent.  There  is 
nothing  whatever  in  the  law  to  prevent  any  com- 


438 

pany  from  doing  an  assessment  business,  if  it 
chooses  to  do  it,  and,  therefore,  there  is  no 
foundation  for  the  statement  that  it  is  unfair  to 
compel  one  class  of  companies  to  maintain  what  is 
known  as  the  legal  reserve,  and  exempt  the  other 
class  from  it. 

(27)  The  man  who  believes  that  a  single  method 
of  life  insurance  can  be  adopted  that  will  meet  the 
needs  and  views  of  more  than  seventy  million  peo- 
ple, is  dreaming.  It  would  be  as  impossible  to  carry 
on  the  business  by  one  method  as  it  would  be  to 
carry  on  a  government  by  one  party.  It  would  be 
sure  to  drift  into  a  universal  trust  monopoly,  or  in 
effect  become  plutocratic,  and  opposed  to  the  prin- 
ciples of  our  Republican  form  of  government. 

INDEX  AND   SUMMAKY    OF   CONCLUSIONS. 

Note. — Starting  points  of  the  statements  and 
reasoning  in  this  paper,  upon  which  the  following 
conclusions  are  based,  are  indicated  in  every  case 
by  the  figure  inclosed  in  parenthesis  corresponding 
with  the  number  of  the  conclusion. 

(1)  Assessment  is  the  fixing  of  the  price  of  insur- 
ance for  each  individual  life  by  an  authority  in  ac- 
cordance with  its  judgment  rather  than  by  law. 

(2)  Any  authority  fixing  the  price  of  insurance 
should  be  required  to  show  upon  what  assumption 
or  experience  it  is  based. 


439 

(3)  The  promoters  of  a  company  should  be  re- 
quired to  deposit  with  the  State  at  least  $25,000, 
to  be  retained  by  it  as  a  guarantee,  until  the  assets 
amount  to  $200,000. 

(4)  No  charter  should  be  granted  by  the  State 
until  the  plans  of  the  corporation  are  indorsed  by 
a  competent  actuary,  and  shall  have  been  approved 
in  writing  by  the  insurance  commissioner. 

(5)  The  guardianship  of  the  State  should  not, 
in  a  material  degree,  extend  beyond  the  period  of 
organization.  Valuation  by  governmental  author- 
ity from  data  furnished  by  the  company,  of  which 
the  valuers  have  no  actual  knowledge  as  to  its  cor- 
rectness, is  a  fraud  upon  the  public. 

(6)  The  present  system  of  net  valuation  as  a 
test  of  solvency  is  not  applicable  to  assessment  life 
companies. 

(7)  The  net  valuation  system  as  a  test  of  solv- 
ency has  been  condemned  by  expert  American  au- 
thorities. 

(8)  Ever-changing  economic  conditions  render  a 
standard  of  safety,  on  the  hard  and  fast  lines  laid 
down  in  the  statute,  unsafe — a  point  illustrated  by 
a  review  of  our  currency  system. 

(9)  Self-government  is  the  pride  of  Anglo- 
Americans  as  a  people.  Legislation  of  a  paternal 
character,  which  is  not.  uniform  in  the  several 
States,  is  contrary  to  the  spirit  of  our  constituti  on 


440 

•  (10)  Governmental  valuation,  or  State  standard 
of  solvency,  condemned  by  representative  British 
actuaries. 

(11)  Instead  of  governmental  valuation,  com- 
panies should  be  required  to  furnish  policy  sched- 
ules calling  for  sufficient  information  to  enable 
any  actuary,  as  well  as  insurance  departments,  to 
check  the  company  valuations. 

(12)  The  existing  assessment  laws  of  the  several 
States  conform  in  important  particulars  to  the 
principles  of  the  British  law. 

(13)  A  company  once  fully  established,  which, 
"on  the  basis  of  its  own  experience,  can  discharge 
its  present  and  future  obligations,  is  solvent,  no 
matter  what  may  be  the  provision  of  the  law. 

(14)  Supervision  should  be  restricted  to  the  exe- 
cution of  laws,  the  compilation  and  publication  of 
reports,  and  to  examinations  made  at  the  expense  of 
the  State  by  an  expert  examiner  solely  in  its  employ. 

(15)  Actuarial  treatment  becomes  an  important 
factor  when  the  premium  stipulated  is  in  excess  of 
the  natural  cost. 

(16)  Charging  an  accumulation,  based  on  and 
resulting  from  aggregate  and  average,  with  indi- 
-vidual  policy  liability,  is  an  anomaly. 

(17)  Mathematical  reserve  determined  by  ex- 
tperience  and  policy  conditions.  Impairment  cured 
by  special  assessment,  or  by  scaling  the  insurance. 


441 

(18)  Three  millions  of  citizens  of  the  United 
States  hold  policies  of  insurance  to  which  the  State 
standard  of  solvency  does  not  apply. 

(19)  The  process  of  treating  original  data  which 
does  the  least  violence  to  the  natural  and  actual 
results  is  undoubtedly  the  best. 

(20)  The  difference  between  the  hypothetical 
and  experience  methods  of  valuation,  showing  a 
reduction  of  41  per  cent,  in  the  accumulation  ele- 
ment in  the  latter,  illustrated. 

(21)  Under  the  experience  method,  a  safety 
clause  provision  similar  to  the  British  statute  is 
not  only  contemplated,  but  imperative. 

(22)  'New  companies  employing  the  experience 
method  should  use  the  thirty  American  oflSce  ex- 
perience until  their  own  is  sufficiently  extended  to 
form  a  substantial  basis  of  calculation. 

(23)  The  expense  element  a  factor  too  often 
neglected. 

(24)  In  the  determination  of  a  proper  expense 
charge,  companies  should  be  divided  into  three 
classes. 

(25)  While  official  treatment  must  be  governed 
by  the  laws  and  actuarial  conditions,  no  plan  or 
system  of  life  insurance  can  be  wholly  measured  or 
condemned  by  past  failures,  but  important  lessons 
may  be  learned  from  them. 

(26)  If  advice  and  suggestions  had  been  substi- 


442 

tuted  for  condemnation,  the  post-mortem  assess- 
ment plan,  notwithstanding  its  objectionable  fea- 
tures, could  have  been  made  a  success. 

(27)  The  man  who  believes  that  a  single  method 
of  life  insurance  will  meet  tlie  needs  and  views  of 
more  than  seventy  millions  of  people,  is  dreaming. 


FRATERNAL  INSURANCE. 
ADAM  WARNOCK  : 

In  submitting  for  consideration  and  debate  my 
contribution  upon  the  subject  of  "  Fraternal 
Insurance,"  I  am  happy  in  the  fact  that  I  am  ad- 
dressing an  audience  familiar  with  all  phases  of  the 
question,  thus  making  unnecessary  any  kinder- 
garten instruction  concerning  what  is  meant  by 
*'  Fraternal  Insurance."  Nor  am  I  called  upon  to 
defend  the  right  of  fraternal  insurance  to  exist. 
That  it  does  exist,  that  it  is  so  powerful  in  our 
land,  that  it  has  accomplished  so  much  in  thirty 
years, — all  these  self-evident  facts  prove  that  a 
need  for  it  called  it  into  existence. 

Fraternal  insurance  need  not  be  discussed  in  the 
light  of  a  rival  or  antagonist  of  other  forms  of  in- 
surance. It  occupies  a  field  of  its  own,  and  has 
received  in  a  large  degree  support  from  those  who 
would  not  have  carried  any  other  kind  of  insur- 


443 

ance.  It  may  be  fairly  claimed,  too,  that  it  has 
educated  up  to  the  need  of  protection  for  the 
family  a  great  many  people  that  may  otherwise 
never  have  given  the  matter  a  thought.  No  better 
proof  need  be  cited  than  the  growth  of  the  large 
business  insurance  corporations  coincident  with  the 
development  of  fraternal  insurance.  Why  may 
not  this  reciprocal  relation  be  more  clearly  under- 
stood and  then  fostered  and  encouraged  ?  When 
injudicious  criticism  upon  one  form  of  insurance 
has  been  made,  it  does  not  always  follow  that  per- 
fect faith  has  been  established  in  that  form  repre- 
sented by  the  critic.  On  the  contrary,  it  fre- 
quently happens  that  such  mistrust  is  created  that^ 
all  insurance  is  rejected. 

Is  it  not  possible,  then,  to  map  out  some  common 
ground  upon  which  all  may  meet,  and,  as  a  result  of 
mutual  forbearance  and  concession,  assign  to  each 
form  of  work  its  own  appropriate  field  of  action  ? 
It  is  quite  probable  that  such  unity  of  action  would 
be  vastly  more  profitable  to  all  concerned  than  a 
condition  of  constant  antagonism  by  means  of 
which  resources  are  exhausted  without  compen- 
sating results. 

The  various  phases  of  all  kinds  of  insurance  will 
be  ably  presented  at  this  convention,  and  the 
strong  points  of  each  will  be  set  forth  by  those  se- 
lected and  fully   qualified   to  speak    upon   their 


444 

chosen  themes.  I  will  content  myself  with  suggest^ 
ing  the  features  that  commend  fraternal  insurance 
to  public  confidence  and  support  and  with  mention- 
ing some  improvements  that  may  be  wisely  adopted. 

Will  it  be  denied  that  fraternal  insurance  has 
furnished  successfully  temporary  protection  to 
those  who  have  availed  themselves  of  its  benefi- 
cence ?  If  so,  the  best  answer  is  the  bare  state- 
ment that  over  $400,000,000  has  been  distributed 
among  its  beneficiaries.  A  tree  that  has  borne 
such  good  fruit  must  be  good  to  graft  upon,  even 
if  it  is  claimed  that  the  tree  itself  shows  signs  of 
d^cay.  The  living  essence  is  there,  and  proper 
.pruning  and  treatment  will  restore  vigor  and 
luxuriant  growth. 

If  experience  shows  that  changes  are  needed  in 
order  that  what  has  been  so  successful  as  a  tem- 
porary measure  of  protection  may  be  made  equally 
successful  for  all  time,  the  system  possesses  an  in- 
herent elasticity  that  makes  possible  even  the 
most  radical  changes  and  amendments  without  de- 
stroying the  fundamental  object  of  the  afiiliation. 
The  changes  proposed  cannot  possibly  be  more 
radical  than  those  adopted  by  other  forms  of  in- 
surance during  the  past  thirty  years.  In  all 
candor  and  fairness  it  may  be  added  that  fraternal 
insurance  societies  have  not  waited  until 
compelled  by  legislative  enactment  to  make  needed 


445 

changes,  but  sometimes  have  been  compelled  to 
ask  legislative  permission  for  the  improvements 
adopted  of  their  own  volition. 

Logically  and  in  proper  sequence  is  here  sug- 
gested one  thought  that  may  be  urged  as  an 
improvement  upon  fraternal  insurance.  There 
should  be  uniform  legislation  throughout  the 
country  applying  to  fraternal  insurance,  and  na- 
tional supervision.  The  wisdom  of  this  is  too  ap- 
parent to  need  argument.  An  examination  by  a 
national  supervisor  acting  under  authority  of  the 
general  government  would  serve  for  all  the  country 
and  be  accepted  perforce  in  its  findings.  Nothing 
we  have  at  present  inspires  the  confidence  that  would 
follow  such  national  supervision  and  examination. 

I  would  farther  advocate  that  each  society  or- 
ganized be  compelled  to  assess  a  minimum  number 
of  assessments  each  year.  Naturally  in  the  early 
years  of  its  existence  a  fund  would  be  accumulated 
in  excess  of  demands  for  mortuary  claims.  This 
excess  could  be  allowed  to  accumulate  for  the  need 
sure  to  come  when  increased  age  brought  increased 
cost  by  increased  mortality.  Sufficient  experience 
has  been  gained  to  enable  us  to  estimate  with 
reasonable  accuracy  what  reserve  should  be  ac- 
cumulated by  fraternal  insurance  societies  to  cover 
the  risk  carried.  With  a  mortuary  benefit  not  ex- 
ceeding $2,000,  the  invested  accumulation  of  the 


446 

early  years  would  go  far  towards  creating  the 
reserve  needed,  and  what  balance  may  be  required 
would  be  made  good  voluntarily  by  the  society. 

But  if  a  mortuary  benefit  in  excess  of  $2,000  was 
promised,  the  creation  of  an  adequate  reserve 
should  be  made  compulsory.  My  reason  for  this 
may  be  briefly  stated,  thus :  The  payment  of  a 
benefit  of  not  exceeding  $2,000  is  within  the  realm 
tliat  seems  peculiarly  the  field  of  operation  of  fra- 
ternal insurance.  The  object  is  to  give  the  family 
of  the  deceased  member  a  modest  benefit  that  shall 
furnish  protection  when  most  needed,  and  yet  be 
no  heavy  burden  during  his  lifetime.  When  a 
benefit  in  excess  of  $2,000  is  carried,  it  may  fairly 
be  claimed  that  we  leave  the  realm  of  fraternity 
and  approach  the  proposition  from  the  purely 
business  standpoint  and  that  then  rules  and  regu- 
lations should  be  made  and  enforced  that  accord 
with  the  changed  relations  thus  created. 

The  age  of  admission  should  be  graduated  from 
18  to  45.  If  provision  for  admission  of  persons  over 
45  is  desirable,  such  should  be  placed  in  a  special 
class  and  rates  fixed  adequate  to  cover  increased 
risk  and  cost. 

Three  elements  enter  into  the  amount  collected 
for  a  life  insurance  premium— the  mortuary  cost, 
the  expense  cost,  and  the  reserve.  They  should  be 
carefully  considered. 


447 

We  all  understand  tliat  tlie  mortuary  risk  on  a 
given  life  is  the  same,  no  matter  what  form  of  in- 
surance protection  is  carried.  Therefore  the  sum 
that  must  be  collected  to  cover  the  mortuary  cost 
cannot  vary  and  must  be  provided  for.  There  can 
be  a  wide  divergence  in  the  cost  of  management, 
and  in  this  item  I  assert  that  fraternal  insurance 
is  entitled  to  favorable  comment.  That  brings  us 
to  the  third  factor  of  the  problem,  the  reserve  ele- 
ment. The  establishment  of  a  large  reserve  has  not 
always  proved  a  safeguard  against  loss,  and  it  is  a 
serious  problem  yet  to  be  solved  what  the  outcome 
will  be  of  the  accumulation  of  the  vast  aggrega- 
tions of  money,  compelled  by  statute  law,  now  held 
by  business  insurance  corporations.  But  that  some 
reserve  should  be  set  aside  to  meet  increasing 
mortuary  cost  caused  by  increased  age,  is  a  propo- 
sition that  cannot  successfully  be  refuted.  The 
minimum  number  of  assessments  yearly  above  ad- 
vocated, should  be  ample  to  cover  mortuary  cost  in 
the  early  days  of  the  society,  and  to  leave  a  sur- 
plus that  would  be  a  substantial  nucleus  for  the 
reserve  needed.  How  much  shall  be  added  as  the 
society  increases  its  age  must  be  determined-  and 
raised  as  experience  dictates. 

The  mortuary  cost  being  invariable  as  far  as  the 
form  of  insurance  is  concerned,  the  only  saving  to 
the  insured  may  be  partly  in  the  amount  of  re- 


448 

serve  deemed  necessary,  and  chiefly  in  the  expense 
of  management.  Each  of  these  elements  must  be 
considered  with  greatest  care.  The  mortuary  cost 
can  be  calculated  with  certainty.  The  expenses 
should  be,  and  in  fraternal  societies  are,  kept 
down  to  the  lowest  limit  because  there  is  no  ex- 
pense for  a  large  agency  force,  each  member  of  the 
association  doing  all  he  can  to  add  to  the  member- 
ship. This  is  done  under  the  inspiration  of  that 
fraternal  impulse  which  knits  the  members  closely 
together,  and  is  in  itself  one  of  the  strongest  claims 
in  favor  of  fraternal  insurance. 

There  is  much  valuable  information  of  a  statistic 
cal  nature  I  might  present  to  show  what  has  been 
done  by  fraternal  insurance  societies,  but  I  will 
content  myself  with  a  brief  summary  of  the  most 
important  facts  culled  from  the  latest  compilations. 
They  will  serve  to  show  the  marvelous  growth  of 
the  system  and  the  widespread  influence  it  has 
exerted  upon  our  country  : 


Name  of  Order. 

1 
O 

Mem- 
bership, 
1897. 

Amount 

Claims 

Paid 

1897. 

Ahawas  Israel,  Ind.  Order 

American  Benefit  Society 

1890 
1898 
1890 
1878 
1895 
1867 
1878 
1870 

2,603 
4,381 
3,680 
21,315 
3,026 
347,990 
4,545 
6,156 

118,114  00 
32,750  00 
48  000  00 

American  Guild 

American  Legion  of  Honor 

1,988,500  00 
16,500  00 

7,761,934  41 

88,000  00 

164,893  00 

Ancient  Order  of  the  Pyramids 

Ancient  Order  of  United  Workmen. . 
Artisans'  Order  of  Mutual  Protection 
B'nai  B'rith,  Ind.  Order 

449 


Name  of  Order. 


Ben  Hur,  Supreme  Tribe  of 

Bohemian  C.  C.  U 

Bohemian  Slavonian  Knights  and 
Ladies 

Brotherhood  of  the  Union 

Canadian  Order  of  Foresters 

Catholic  Benevolent  Legion 

Catholic  Knights  of  America 

Catholic  Knights  of  Wisconsin 

Catholic  Mutual  Benefit  Association. . 

Catholic  Order  of  Foresters 

Catholic  Relief  &  Beneficiary  Ass'n . . 

Catholic  Women's  Benevolent  Legion 

Chosen  Friends,  Order  of 

Foresters  of  111.,  Ind.  Order  of 

Fraternal  Aid  Association 

Fraternal  Alliance 

Fraternal  Tribunes 

Free  Sons  of  Israel,  Ind  Order 

Foresters,  Ind.  Order  of 

Fraternal  Legion 

Fraternal  Mystic  Circle 

Fraternal  Union  of  America 

Free  Sons  of  Israel,  Ind.  Order 

Gen.  Assembly  of  the  Amer.  Benevo- 
lent Ass'n 

Golden  Cross,  United  Order ... 

Golden  Star  Fraternity 

Good  Fellows,  Royal  Society  of . . .    . 

Heptasophs,  Improved  Order 

Hermann's  Sons  of  Wisconsin 

Home  Circle 

Home  Forum  Benefit  Order 

Independent  Order  Mutual  Aid 

Independent  Order  of  Foresters 

Ind.  Western  Star  Order 

Knights  and  Ladies  of  Honor 

Knights  and  Ladies  of  Security 

Knights  and  Ladies  of  the  Fireside . . 

Knights  and  Ladies  of  the  Golden  Star 

Knights  of  Columbus 

Knights  of  Father  Matthew 

Knights  of  Honor 

Knights  of  Pythias  Endowment  Rank 

Knights  of  St.  John  and  Malta 

Knights  of  Sobriety,  Fidelity  and 
Integrity 


1894 

1877 

1892 
1891 
1879 
1881 
1877 
1885 
1879 
1863 
1893 
1895 
1879 
1878 
1890 
1891 
1897 
1871 
1881 
1881 
1885 
1896 
1871 

1894 
1876 
1882 
1882 
1878 

1879 
1892 
1878 
1874 
1895 
1877 
1892 
1894 
1883 
1882 
1881 
1873 
1877 
1883 

1889 


Mem- 
bership, 
1897. 


13,695 

10,827 

1,211 
12,666 
27,165 
46,998 
22,878 

7,438 
43,628 
55,403 

4,077 

4,786 
24,433 
15,136 
13,357 

2,519 

2,518 

12,125 

124,685 

2,318 
12,181 

5,011 
11,500 

2,445 
32,983 

2,097 
10,378 
38,256 

2,308 

6,293 
42,903 

4,950 
124,685 

2,973 
66,437 
18,427 

2,405 

5,304 
17,576 

3,480 
89,679 
51,715 

3,788 

4,273 


Amount 

Claims 

Paid 

1897. 


74,700  00 
160,800  00 

20,000  00 

57,500  00 
152,325  00 
1,081,407  00 
710,208  00 
100,000  00 
690,000  00 
327,200  00 

36,333  00 

14,000  00 
848,468  00 
196,300  00 

93,500  00 

6,047  00 

4,060  41 

277,927  97 

992,226  00 

42,150  00 
173,250  00 

22,075  00 
232,492  00 

11,390  92 

494,150  00 

23,315  00 

324,370  00 

583,400  00 

63,800  00 

153,696  00 

328,608  00 

122,000  00 

992,226  00 

7,500  00 

1,191,500  00 

168,967  00 

12,333  33 

60,828  00 

87,000  00 

45,200  00 

3,918,264  00 

1,108,180  00 

52,000  00 

60.598  00 


450 


Name  of  Order. 


Knights  of  the  Golden  Eagle 

Knights  of  the  Maccabees 

Ladies  Catholic  Benevolent  Associa- 
tion  

Ladies  of  the  Maccabees 

Legion  of  the  Red  Cross 

Loyal  Additional  Benefit  Association 

Loyal  Mystic  Legion  of  America 

Low  German  Gr.  Lodge  of  the  U.S. 
in  No.  Am 

Masonic  Protective  Association 

Modern  Woodmen  of  America 

Mutual  Protection,  Order  of 

Mystic  Workers  of  the  World 

National  Benevolent  Society 

National  Protective  Legion 

National  Provident  Union 

National  Reserve  Association 

National  Union 

New  England  Order  of  Protection. . . 

Northwestern  Legion  of  Honor 

North  American  Union 

Pilgrim  Fathers,  United  Order  of 

Protected  Home  Circle 

Ridgeby  Protection  Association 

Royal  Arcanum 

Royal  Circle 

Royal  League 

Royal  Neighbors  of  America 

Royal  Temp,  of  Temperance 

Royal  Tribe  of  Joseph 

Scottish  Clans,  Order  of  . . 

Shield  of  Honor 

Supreme  Council,  Home  Circle 

Supreme  Council,  Legion  of  Honor. . 

Supreme  Court  of  Honor  

Supreme  Lodge,  Nat.  Reserve  Asso- 
ciation  

Supreme  Lodge,  Order  of  Columbian 
Knights 

Supreme  Ruling,  Fraternal  Mystic 
Circle 

United  Friends,  Order  of 

United  Friends  of  Michigan 

Women's  Catholic  Order  of  Foresters 

Woodmen  of  the  Word  

Workmens'  Benefit  Association 


V. 

^ 

Mem- 

c 

bership, 

r^ 

1897. 

o 

1891 

2,236 

1881 

217,068 

1890 

32,273 

1890 

26,380 

1885 

4,012 

1889 

5,373 

1892 

3,606 

1888 

5,560 

1895 

4,060 

1883 

259,584 

1878 

4,589 

1896 

2,545 

1894 

2,509 

1891 

5,320 

1883 

3,972 

1891 

4,336 

1881 

46,602 

1887 

21,950 

1884 

2,496 

1895 

2,717 

1879 

23,039 

1886 

23,652 

1894 

10,078 

1877 

195,105 

3,199 

1883 

15,100 

1895 

12,120 

1878 

12,435 

1894 

3,178 

1878 

4,335 

1877 

9,659 

1880 

6,293 

1879 

3,396 

1895 

24,217 



3,241 

1895 

4,594 

1885 

12,181 

1881 

10,491 

1889 

3,246 

1891 

13,869 

1890 

97,811 

1893 

5,841 

Amount 

Claims 

Paid 

1897. 


43,000  00 
1,754,926  00 

179,500  00 

131,450  00 

36,200  00 

86,000  00 

11,000  00 

14,500  00 

11,472  50 

1,905,250  00 

54,930  00 

7,000  00 

8,468  68 

79,952  00 

163,850  00 

18,500  00 

1,239,470  00 

294,000  00 

35,250  00 

13,000  00 

352,000  00 

157,500  00 

28,503  75 

5,210,823  00 

6,100  00 

307,875  00 

31,500  00 

333,467  00 

11,975  00 

39,750  00 

106,000  00 

153,695  59 

96,000  00 

88,300  00 

31,000  00 

26,101  36 

177,500  00 

415,608  00 

49,284  00 

62,000  00 

1,088,558  00 

29,000  00 


451 

The  total  membership  of  the  foregoing  list  is 
2,557,374.  Amount  of  benefits  paid  in  1897, 
$41,070,746.92. 

Total  payments  from  1867  to  1897,  over 
$420,000,000. 

The  Ancient  Order  United  Workmen  was  organ- 
ized in  1867  with  a  few  members  ;  in  1897,  thirty 
years  after  organization,  its  membership  was 
347,990;  amount  paid  in  benefits  in  1897,  $7,761,- 
934.41  ;  total  amount  paid  to  beneficiaries  of  de- 
ceased members  during  the  thirty  years,  $80,- 
722,473.41. 

The  Knights  of  Honor  was  organized  in  1873  with 
seventeen  members,  and  in  1897  had  a  membership 
of  89,679.  Paid  benefits  in  1897  amounting  to 
$3,918,264,  and  has  paid  to  beneficiaries  during  its 
existence,  $58,285,224. 

The  Royal  Arcanum  was  organized  in  1877  with 
nine  members,  and  in  1897  had  a  membership  of 
195,105.  It  paid  to  beneficiaries  in  1897,  $5,210,- 
823,  and  has  made  a  total  payment  since  organiza- 
tion of  $43,914,045.28. 

The  American  Legion  of  Honor  was  organized  in 
1878  with  nine  members  ;  it  paid  benefits  in  1897 
amounting  to  $1,983,500,  and  has  paid  since  organ- 
ization, $36,784,349.93.  Membership  in  1897, 
21,315. 

Combine  the  four  orders  above  named  and  it 


462 

shows  a  membersliip  of  654,089  ;  a  total  payment  of 
benefits  in  1897  of  $18,874,521.41,  and  a  total  pay- 
ment since  organization  of  over  $219,706,092.62. 

Need  more  be  said  to  justify  the  existence  of 
fraternal  insurance?  The  bare  recital  of  the 
figures  here  given  carries  with  it  more  force  than 
the  most  eloquent  language.  Add  to  the  system 
the  improvements  and  safeguards  experience 
proves  necessary,  and  future  achievements  will 
dwarf  into  comparative  insignificance  the  grand 
results  of  the  past.  That  this  will  be  done,  I  have 
full  faith,  for  I  know  the  unselfish  devotion  to  the 
best  interests  of  mankind  manifested  by  the  leaders 
of  fraternal  thought,  and  it  is  upon  this  solid  rock 
I  build  my  hope  for  the  continued  triumph  of  the 
benefactions  of  fraternal  insurance. 


DISCUSSION. 

WM.  D.  WHITING  : 

Mr.  Eldridge  has  presented  a  clearly  arranged 
and  expressed  summary  of  the  most  advanced 
thought  of  the  day  regarding  Assessment  insur- 
ance— one  which  deserves  the  careful  considera- 
tion of  those  engaged  in  that  branch  of  the  life 
business. 


453 

He  candidly  admits  the  mistakes  of  the  past, 
recognizes  the  necessity  for  maintaining  the  stat- 
utory reserves  called  for  by  the  nature  of  the  con- 
tract (increased  somewhat  on  short-term  insurance), 
with  the  added  security  of  a  ''safety  clause"  to 
replenish  said  reserves  in  the  event  of  their  impair- 
ment. I  can  see  no  objection,  mathematical  or 
otherwise,  to  this  general  programme,  which  has 
gradually  been  taking  shape  for  twenty  years  both 
from  an  assessment  and  old-line  standpoint.  In 
fact,  when  it  comes  to  be  fully  realized  there  will 
cease  to  be  any  great  distinction  between  assess- 
ment and  old  line  companies. 

Mr.  Eldridge  fully  recognizes  this  when  he  ad- 
mits that  "There  is  but  one  system  of  life  insur- 
ance" correctly  possible.  To  this  system  all 
attempts  must  eventually  conform,  although  much 
time,  effort  and  money  may  be  wasted  in  re- 
discovering the  fact.  This  central  system  is  neither 
that  of  the  fraternal,  assessment,  stipulated  i)re- 
mium  or  old-line  company  of  the  present  day 
exactly,  although  they  each  approximate  toward 
it  in  the  order  named,  with  the  old  line  company 
nearest  to  the  goal. 

The  old-line  laws  were,  therefore,  nearest  cor- 
rect. And  instead  of  having  passed  such  an  incon- 
gruous phantasmagoria  as  the  fraternal,  assess- 
ment and  stipulated  premium  laws,  it  would  have 


454 

been  much  better  to  have  merely  amended  the 
regular  statutes  in  those  few  particulars  in  which 
a  change  is  generally  recognized  as  being  needed. 
There  never  was  a  time  when  anything,  that  was 
proper  to  do,  could  not  have  been  done  just  as 
well  under  the  regular  insurance  statutes,  as  under 
the  fraternal,  assessment  or  stipulated  premium 
laws.  Any  old-line  company  can  to-day  establish 
a  system  of  lodges,  or  put  a  safety  clause  in  its 
contracts,  which  are  the  only  essential  distinctions 
between  the  several  methods.  When  a  ''safety 
clause"  occurs,  the  statutory  reserves,  while 
equally  valuable  for  other  purposes,  cannot  be 
used  to  determine  solvency,  until  the  failure  of 
recoupment  by  extra  assessment  has  been  demon- 
strated ;  and  no  court  would  so  decree. 

That  these  new  laws  were  worse  than  useless,  is 
well  demonstrated  by  Mr.  Eldridge's  recognition 
that  they  now  actually  stand  in  the  way  of  reform. 
But  he  should  not  lay  the  blame  for  this  upon 
legislators  or  commissioners.  All  of  the  earlier 
and  fundamental  laws,  and  most  of  those  subse- 
quent, were  passed  at  the  instance  of  the  associa- 
tions and  societies.  In  my  opinion  the  most 
comprehensive  and  needed  reform  in  the  premises 
is  the  absolute  and  immediate  repeal  of  all  such 
laws,  accompanied  with  a  few  amendments  to  the 
old  line  law,  re-incorporating  existing  associations, 


465 

altering  slightly  the  computation  for  reserves, 
regulating  the  use  of  the  safety  clause,  and  making 
some  better  disposition  of  an  insolvent  concern 
than  a  mere  distribution  of  its  cashable  assets.  It 
is  quite  plain  all  life  insurance  is  moving  toward  a 
common  centre  ;  such  legislative  action  would  stop 
the  starting  of  irresponsible  incorporations,  and 
regulate  those  in  existence  in  accordance  with  the 
mathematical  requirements  of  such  contracts  as 
they  might  choose  to  issue,  and  in  case  of  failure 
save  what  might  be  desirable  of  the  wreck. 

There  are  many  valuable  minor  suggestions  in 
Mr.  Eldridge's  paper,  which  the  time  allotted  to 
criticism  debars  me  from  discussing.  The  most  im- 
portant of  these,  however,  is  a  recognition  that  the 
statutory  reserve  on  short  term  policies  is  wholly 
insufficient  to  protect  the  insurance— this  is  equally 
true  under  old  line  short  term  policies.  The  rem- 
edy is  that  no  reserve  on  any  policy  should  fall 
below  a  minimum  consisting  of  the  unearned  net 
premium  and  the  cost  of  say  six  months'  additional 
insurance  thereunder — the  six  months'  cost  being 
forfeitable  in  case  of  lapse,  as  a  set  off  to  the  dam- 
age by  withdrawal.  Six  months'  cost  is  a  better 
measure  of  said  damage  than  a  percentage  of  an 
arbitrary  single  premium,  which  has  no  relation  to 
the  damage. 

I  am  unable  to  agree  with  Mr.  Eldridge's  remark 


456 

that  term  insurance  will  continue  to  be  the  bulk  of 
the  business  done  by  the  associations.  Insurance 
business  in  England  generally  began  on  a  term  basis 
and  was  practically  dropped  with  greater  experience 
by  all  kinds  of  companies,  including  friendly 
societies.  The  change  is  equally  noticeable  here, 
and  companies  generally  which  some  time  ago  made 
a  specialty  of  term  insurance  are  now  relegating  it 
to  the  rear. 

In  view  of  the  advanced  and  commendable  stand, 
which  such  men  as  Messrs.  Eldridge,  Fouse  and 
others  have  publicly  taken,  isn'  t  it  about  time  that 
denunciatory  literature  against  high  premiums  and 
mathematical  reserves  should  cease  ? 

Mr.  Fouse' s  paper  is  too  discursive  to  attempt  an 
exhaustive  discussion  in  detail — many  of  its  topics 
would  in  themselves  furnish  matter  for  a  separate 
paper.  He  has,  however,  very  thoughtfully  sup- 
plied a  "  Summary  of  conclusions"  which  for  the 
purpose  of  discussing  its  main  features  may  be  con- 
densed into  the  following  propositions  : — 

That  an  assessment  company  should  be  required 
to  make  a  government  deposit  of  at  least  $25,000, 
and  have  its  plans  approved  by  the  insurance  com- 
missioner before  being  allowed  to  do  business. 
That  the  company  should  be  permitted  to  select  its 
own  basis  and  method  of  reserve,  merely  furnishing 
sufficient  data  to  show  that  its  computations  on 


457 

said  basis  are  arithmetically  correct.  He  recom- 
mends the  assumption  of  Meech'  s  mortality  until 
the  company  has  been  in  business  about  twenty 
years  and  has  accumulated  about  $100,000,000  of 
insurance,  when  its  own  past  mortality  experience 
should  be  substituted  for  Meech  ;  he  denounces  the 
net  premium  method  of  computation  as  a  measure 
of  solvency,  and  omits  any  fixed  assumptions  for 
expenses  and  interest. 

As  to  the  first,  there  never  was  any  good  reason 
why  the  usual  $100,000  of  deposit  guaranty  for 
good  faith  should  have  been  omitted  from  the  as- 
sessment laws,  when  experience  had  demonstrated 
its  necessity  in  every  other  kind  of  incorporation. 
In  fact,  it  is  difficult  to  understand  why  any  such 
thing  as  a  separate  assessment  law  was  ever  per- 
mitted at  all.  There  was  enough  law  under  pre- 
ceeding  statutes  to  permit  any  life  insurance  corpo- 
ration to  put  a  "safety  clause"  into  its  contracts, 
which  is  the  only  essential  and  mathematical  dis- 
tinction, and  quite  sufficient  to  prevent  the  statu- 
tory reserve  from  being  charged  as  a  liability  to 
ascertain  solvency,  or  being  used  for  any  other  pur- 
pose than  to  determine  the  amount  of  divisible 
surplus  or  necessity  for  extra  assessment.  It  has 
been  the  great  misfortune  of  these  companies  that 
they  have  not  recognized  this  important  fact  from 
the  beginning.   The  same  remark  is  applicable  to  the 


^8 

new  so-called  *' stipulated  premium"  laws.  While 
a  recognized  improvement  in  several  respects  upon 
the  assessment  laws,  they  are  unnecessary  so  far  as 
they  duplicate  old  line  statutes,  and  erroneous  so 
far  as  they  depart  therefrom.  This  position  like- 
wise affords  a  complete  answer  to  Mr.  Fouse's  ani- 
madversions against  the  net  premium  method  of 
computation.  Where  the  exi)ense  element  has 
been  fixed  by  contract  and  a  ''safety  clause"  ex- 
ists, this  method  is  the  very  one  to  be  applied  par 
excellence,  as  it  cannot  in  such  cases  be  used  for 
determining  solvency,  but  merely  the  time  and  ex- 
tent of  an  extra  assessment.  Should  this  assess- 
ment fail  of  realization,  however,  then  some  modi- 
fication of  the  net  method,  best  determinable  by 
the  surrounding  circumstances,  would  unquestion- 
ably be  desirable.  But  the  old-line  laws  have  al- 
ways recognized  this.  Although  the  assertion  has 
assiduously  been  made  to  the  contrary,  in  and  out 
of  season,  I  am  not  aware  of  any  State,  chartering 
an  existing  life  company,  having  any  law  which 
compels  a  dissolution  upon  an  impairment  of  a  four 
per  cent,  net  reserve  without  some  modification. 
In  Massachusetts  when  such  a  reserve  is  impaired, 
the  court  may  make  inquiry  into  the  situation, 
but  is  untrammeled  as  to  what  rule  it  may  adopt 
for  determining  solvency.  In  Connecticut  no  com- 
pany can  be  declared  insolvent  until  the  four  per 


459 

cent.  American  reserve  has  been  impaired  twenty - 
five  per  cent,  which  is  certainly  all  the  margin  any- 
one could  ask.  In  New  York  a  company  may  be 
made  the  subject  of  judicial  inquiry  when  four 
one-half  per  cent.  American  reserve  (gross  valuation 
may  be  employed)  is  impaired,  but  the  Court  is  not 
limited  to  any  rule  ;  and  yet  the  companies  char- 
tered by  these  States  are  doing  more  than  three- 
fourths  of  all  the  old  line  life  business  of  the 
country. 

It  is  true  that  commissioners  are  required  to  step 
in  and  stop  payment  of  dividends,  and  to  halt  new 
business,  when  a  net  reserve  becomes  impaired ; 
because  at  that  point  the  company  is  beginning  to 
encroach  on  future  profits  for  present  necessities. 
This  is  the  proper  function  of  a  net  premium  re- 
serve, to  which  I  do  not  understand  Mr.  Fouse 
objects—  it  is  in  the  nature  of  an  alarm  bell  at  the 
approach  of  danger  ;  not  to  regard  which  would  be 
a  fraud  upon  new  members. 

As  to  the  approval  of  the  original  plans  and 
rates  of  a  company,  by  the  commissioner  of  insur- 
ance, and  prohibition  of  any  subsequent  change 
without  his  consent — which  necessarily  includes 
the  consent  of  every  State  Commissioner  where  the 
company  does  business — the  doctrine  sounds  rather 
strange  to  American  ears,  and  seems  to  be  a  con- 
tradiction of  the  demand  for  individual  freedom 


460 

and  relief  from  paternalism,  which  Mr.  Fouse  makes 
so  prominent  in  other  portions  of  his  paper.  This 
doctrine  may  answer  for  a  patch  in  that  crazy- 
quilt  yclept ''  The  British  system  "  which  stretches 
all  the  way  from  pure  laisser  faire  with  fire  and 
accident  companies,  live-year-board -of -trade  state- 
ments unverifiable  by  examination  with  life  com- 
panies, and  strict  paternal  supervision  over 
friendly  societies,  to  absolute  socialism  through 
government  sale  of  annuities  and  insurance  at  the 
post  office.  But  I  doubt  very  much  whether  Amer- 
icans, after  putting  up  $100,000  as  a  guaranty  of 
ability  and  honesty  would  be  willing  to  have  their 
plans  and  rates,  and  every  modification  thereof, 
practically  dictated  by  that  "  average  political  ac- 
cident known  as  an  insurance  commissioner,"  con- 
cerning the  curtailment  of  whose  discretion  we 
have  heard  so  much  recently. 

In  marked  contrast  to  the  above  piece  of  paterna- 
lism, Mr.  Fouse  demands  that  the  company,  for  all 
purposes,  should  be  allowed  to  prescribe  its  own 
assumptions  as  a  basis  for  future  reserves.  I  say 
"  assumptions  "  advisedly,  as  it  is  quite  as  much 
a  matter  of  assumption  that  a  company  will  dup- 
licate in  the  future  its  own  past  experience,  as  it 
will  that  of  the  past  average  experience  of  a  com- 
bination of  other  companies.  It  is  still  more  likely 
to  do  neither,  as  the  rates  of  mortality,  interest 


461 

and  expenses  are  constantly  changing.  I  have 
never  understood  that  past  experience  on  these 
three  items  (of  which  mortality  is  the  least  impor- 
tant except  on  pure  term  insurance,  now  practi- 
cally abandoned)  was  used  in  any  sense  of  expected 
duplication,  but  rather  as  a  partial  aid  in  guessing 
at  the  future  so  as  to  establish  assumptions  so  high 
as  to  surely  cover.  These  future  assumptions 
must  be  higher  than  what  is  actually  expected  in 
order  to  be  safe  ;  which  makes  a  complete  negation 
to  the  feasibility  of  using  bare  past  experience. 
Suppose  a  company  had  experienced  just  $5.00  per 
$1,000  insurance  for  expenses,  5%  net  interest  and 
70^  of  actuaries  table  of  mortality,  during  last 
twenty  years,  would  any  one  dare  assume  these 
figures  for  next  twenty  years  ?  And  yet  these  are 
just  about  the  facts.  I  am  strongly  of  the  opin- 
ion that  if  the  guessing  is  left  to  the  company, 
instead  of  to  the  law,  that  it  will  be  sadly  abused 
and  made  to  fit  the  temporary  experiences  or 
whims  of  the  management,  instead  of  the  future 
necessities  of  the  company.  Mr.  Fouse  appears 
to  be  afraid  of  an  overguess.  Surely  no  great 
harm  (at  least  comparable  with  an  underguess)  can 
come  of  this — it  would  merely  correct  itself  by 
larger  future  dividends.  Although  perhaps  a  trifle 
too  high  (after  excluding  first  year)  as  to  mortality, 
with  a  certainty  of  declining  interest  ahead,  and 


462 

with  claims  payable  at  once  instead  of  at  the  end 
of  the  policy  year,  the  present  State  basis  of 
actuaries'  4.%  is  certainly  not  too  high  a  standard 
for  future  transactions,  especially  when  compan- 
ies have  no  real  surplus  over  reserve. 

The  paper  of  Mr.  Warnock  is  interesting  inas- 
much as  it  attempts  to  suggest  a  remedy  for  the 
evils  which  now  surround  fraternal  insurance.  The 
number  of  assessments  are  rapidly  rising  in  nearly 
all,  and  being  inequitably  adjusted  to  the  detriment 
of  the  younger  members,  threatens  the  disruption 
of  the  societies.  This  state  of  affairs  has  arisen 
first,  because  it  was  much  easier  to  get  a  volume  of 
business  on  cheap  rates  and  misrepresent  the  in- 
evitable consequences  to  certificate  holders  ;  and 
second  because  these  societies  have  taken  great 
pains  to  eliminate  from  their  official  staff  anyone 
whose  mathematical  ability  exceeded  a  knowledge 
of  the  multiplication  table,  or  who  was  likely  to 
suggest  that  the  management  was  incompetent. 

There  are  but  three  distinct  plans  known  to 
mathematicians  upon  which  a  substantially  uniform 
number  of  assessments  can  be  maintained  : 

1st.  Level  amount  of  insurance,  with  increasing 
basis  of  assessment  adjusted  to  attained  ages — 
which  while  leaving  the  number  of  assessments  uni- 
form, increases  the  amount  of  each  member's  pay- 
ment as  he  grows  older. 


463 

2nd.  An  amount  of  insurance  decreasing  each 
year  as  the  member  grows  older — which  leaves  both 
the  number  and  amount  of  each  member' s  payments 
uniform  from  entry. 

3d.  Level  amount  of  insurance  and  level  premium 
from  entry.  This  can  only  be  accomplished  by  using 
the  old  line  or  stipulated  premium  ordinary  life 
rate,  which  is  high  enough  to  accumulate  the  tech- 
nical statutory  reserve. 

The  fraternal  societies  avoided  either  of  these 
three  clearly  defined  mathematical  propositions 
taught  by  science  and  a  long  previous  experience 
in  Great  Britain  ;  and  attempted  an  absurd  strad- 
dle which  is  now  bringing  them  to  grief.  They  at- 
tempted the  first  proposition  with  a  basis  of  assess- 
ment fixed  at  age  of  entry  instead  of  attained  age. 
Or,  if  you  please,  the  third  proposition,  but  only 
assessing  for  current  mortality  and  not  collecting 
that  full  mathematical  premium  which  was  neces- 
sary to  the  accumulation  of  the  technical  reserve. 
It  is  useless  to  recapitulate  the  silly  arguments 
which  they  used  to  justify  this  unrighteousness — 
they  have  been  demolished  a  thousand  times — 
nothing  but  being  brought  face  to  face  with  im- 
pending failure  has  made  them  cease  their  clatter 
about  *'  new  blood,"  ''  fraternal  sympathy," 
''  stringent  economy,"  '^  few  lapses  and  well  se- 
lected risks."     While  all  of  these  are  well  enough 


464 

in  themselves,  they  merely  postpone  and  do  not  re- 
move, the  effects  of  a  mathematically  vicious  sys- 
tem. Unfortunately  all  that  Mr.  Warnock  has  to 
offer  towards  amelioration  is  an  additional  dose  of 
error.  He  says,  limit  the  insurance  to  $2,000,  and 
age  at  entry  to  not  exceed  age  forty-five.  What  has 
this  to  do  with  the  case  ?  If  your  system  is  prop- 
erly adjusted,  you  can  just  as  well  write  $20,000 
as  $2,000,  and  admit  men  at  any  age  who  pay  the 
corresponding  cost.  If  your  system  is  impro- 
perly adjusted  you  cannot  afford  to  write  any 
amount  above  a  mere  burial  fund  at  any  age.  It 
is  these  very  temporary  makeshifts  which  have 
stood  in  the  way  of  true  reform  for  five  years.  Mr. 
Warnock  seems  to  appreciate  the  necessity  for 
what  he  calls  a  "  reserve  "  and  asks  that  the  socie- 
ties be  required  to  levy  a  "minimum  "  number  of 
assessments.  But  he  very  carefully  abstains  from 
recommending  the  reserve  which  is  mathematically 
required.  If  a  society  is  required  by  law  to  have 
on  hand  the  technical  reserve  which  its  form  of 
contract  makes  requisite,  there  is  no  need  of  both- 
ering about  minimum  assessments — the  greater  in- 
cludes the  lesser.  But  Mr.  Warnock  not  only  ab- 
stains from  recognizing  the  only  true  reserve  which 
can  maintain  a  level  premium  and  level  insurance, 
but  goes  out  of  his  way  to  give  it  a  kick  by  re- 
marking "it  is  a  serious  problem  yet  to  be  solved 


465 

what  the  outcome  will  be  of  the  accumulation  of 
vast  aggregations  of  money,  compelled  by  statute 
law."  This  need  not  trouble  him  in  the  least,  as  a 
fraternal  society  would  have  the  same  kind  of  a 
*'  safety  clause  "  as  the  stipulated  premium  assess- 
ment associations  are  adopting,  requiring  the  mem- 
bers to  make  good  any  loss  which  may  occur  in  the 
technical  reserve  fund.  Precisely  the  same  prob- 
lems confronted  the  friendly  societies  of  Great 
Britain  over  thirty  years  ago.  They  solved  it  by 
dropping  increasing  assessments  and  adopting 
stipulated  premiums  based  on  old  line  rates  and 
reserves.  The  fraternal  societies  of  America  will 
have  to  do  either  this,  or  adopt  an  attained  age 
step-ladder-rate  safeguarded  by  an  emergency  fund 
sufficient  to  make  good  the  damage  by  lapsing.  In 
either  event  the  premium  must  be  collected  in  ad- 
vance and  not  post  mortem.  It  is  entirely  doubt- 
ful whether  going  societies  of  over  twenty  years' 
standing  can  make  the  requisite  changes  in  time  to 
prevent  bankruptcy. 

In  view  of  this,  the  admission  of  Mr.  Warnock 
that  fraternal  insurance  is  merely  temporary  insur- 
ance, is  well  taken.  But  his  claim  as  to  the  insur- 
ance benefits  achieved  from  past  payment  of  large 
amounts  of  death  claims,  becomes  badly  impaired 
by  the  immense  losses  which  are  sure  to  accrue  to 
the  dependents  of  those  who  have  paid  in  a  large 


466 

amount  of  assessments  and  will  suddenly  find 
themselves  without  insurance  and  uninsurable. 
Should  the  law  permit  a  society  to  go  on  selling 
mere  temporary  insurance,  representing  it  to  be 
genuine  life  insurance  ? 


FREDERICK  A.  BETTS  : 

It  would  be  idle  folly  to  attempt  to  discuss  in 
the  limited  manner  which  I  have  felt  the  necessi- 
ties of  the  convention  required,  a  paper  so  elabor- 
ate and  exhaustive  as  Mr.  Eldridge's  paper.  It  is 
certainly  a  scientific  and  thorough  treatment  of  a 
question  which  has  been  a  source  of  peculiar  inter- 
est, not  only  to  the  insurance  departments  of  the 
various  States,  but  also  to  the  managers  of  asso- 
ciations and  above  all  to  the  insuring  public. 
The  chief  reason  for  the  bringing  into  the  world 
of  these  assessment  associations  was,  as  has  been 
pointed  out  by  a  speaker  at  a  previous  session, 
the  desire  upon  the  part  of  promoters  of  organ- 
izations to  appeal  to  the  general  public  from  the 
standpoint  of  a  corporation  freed  from  the  toils 
of  a  stringent  and  severe  reserve  fund,  which  had 
choked  the  life  out  of  many  weak  and  erring 
institutions.      It    is  easy  to  imagine  that  a  sue- 


467    • 

cessful  appeal  could  be  made  upon  these  grounds, 
and  had  assessment  corporations  limited  them- 
selves to  the  legitimate  pursuit  of  this  object,  the 
world  would  not  be  confronted  to-day  with 
a  cdndition  which,  when  I  describe  it  as 
serious,  I  trust  you  will  not  think  me  an  alarmist. 
There  is  no  question  but  that  we  have  arrived 
at  a  critical  stage  in  the  history  of  this  class  of 
corporations.  Practical  admission  has  been  made 
that  the  present  systems  are  unsatisfactory,  and 
in  consequence,  what  has  been  termed,  a  ''stipu- 
lated premium  law,"  has  been  enacted  in  some  of 
the  States.  I  am  opposed  unalterably  to  half- 
way measures  of  relief,  and  it  was,  therefore,  a 
source  of  great  pleasure  to  me  to  be  able  to  per- 
use Mr.  Eldridge's  paper,  and  see  evidences  of  a 
desire  upon  his  part  to  waive  all  technical  dis- 
tinctions and  attempt  to  bring  the  class  of  com- 
panies represented  by  him  upon  a  firmer  basis. 
I  think  that  I  am  doing  the  gentleman  no  injustice, 
^  when  I  state  that  the  position  assumed  by  him  in 
this  document  is  the  most  conservative  in  which 
he  has  ever  placed  himself,  and  I  believe  that, 
had  these  views  been  promulgated  at  an  earlier 
date,  we  should  have  been  saved  some  of  the  spec- 
tacles which  I  fear  will  cloud  our  vision  before  a 
long  time.  The  recognition  of  the  fact  that  as- 
sessment companies  should  and  must  maintain  re- 


•    468 

serve  funds  in  order  to  guarantee  the  stability 
and  futurity  of  their  contracts,  is  a  growth  of  re- 
cent date,  although  the  actuaries  of  old-line  com- 
panies have  from  the  date  of  the  inception  of  as- 
sessment insurance  pointed  out  this  absolute  ne- 
cessity. 

I  trust  that  the  managers  of  other  assessment 
companies  vrill  see  the  light  that  Mr.  Eldridge 
has  seen,  in  order  that  something  may  be  done 
before  it  is  too  late.  The  responsibility  which 
rests  on  these  men  takes  into  account  not  only  the 
payments  which  have  been  made  by  their  insured 
in  excess  of  their  actual  cost,  but  also  the  fact 
that  in  the  event  of  their  failure,  the  insured  are 
deprived  of  their  protection,  when  they  are  in  that 
condition  and  at  that  stage  of  life  when  they  re- 
quire it  most. 

In  a  document  which  emanated  from  my  depart- 
ment, I  pointed  out  that  peculiar  trait  of  human 
nature  even  in  business  men  of  ability,  which  com- 
pels them  to  attempt  to  get  something  for  noth- 
ing. I  don't  know  whether  they  ever  attempt  to 
do  this  in  anything  except  life  insurance  and 
green  goods,  although  I  trust  the  convention  will 
pardon  my  coupling  of  these  terms. 

The  agency  conditions  of  these  associations,  how- 
ever, are  primarily  responsible  for  the  misrepresen- 
tations made  to  prospective  applicants,  and  this 


469 

method  of  soliciting  has  been  countenanced  by  the 
home  office.  It  is  but  a  few  weeks  ago  that  the 
supervising  officer  of  one  of  our  States  compelled  an 
association,  after  an  examination  of  its  affairs,  to 
refrain  from  making  comparisons  upon  its  premium 
calls  between  the  amount  of  insurance  furnished 
by  the  association  and  the  amount  which  would 
have  been  furnished  by  an  old  line  company. 
Surely  if  the  home  office  be  a  constant  offender,  we 
can  hardly  expect  better  results  of  the  agency  corps. 

Laws  of  mortality  are  in  the  aggregate  inflexible, 
and  assessment  companies  can  hope  to  experience 
no  favors  from  this  source.  A  severe  error  which 
these  corporations  has  made  is  the  attempt  to  col- 
lect less  than  the  necessary  cost  of  insurance, 'thus 
educating,  or  rather  deluding,  the  people  into  the 
belief  that  their  assessments  would  be  maintained 
at  this  rate  forever. 

Several  years  passed,  and  the  necessity  for  an  in- 
crease in  the  premium  rates  showed  that  a  condi- 
tion and  not  a  theory  confronted  the  managers. 
An  increase  was  seen  to  be  the  only  thing  which 
could  keep  them  in  existence,  and  it  was  accord- 
ingly made  ;  very  naturally,  howls  of  wrath  poured 
into  every  insurance  department  until  each  coming 
of  a  mail  was  looked  upon  with  horror  by  those  who 
had  to  attend  to  the  correspondence  and  assure 
people  that  these  associations  were  apparently  act- 


470 

ing  within  the  provisions  of  their  policy  contract 
and,  therefore,  the  department  was  not  in  a  position 
to  afford  any  relief.  With  but  few  exceptions, 
this  elicited  more  howls,  directed  this  time,  how- 
ever, at  the  heads  of  the  insurance  departments, 
holding  them  responsible  for  the  condition  of  af- 
fairs ;  and  this,  mark  you,  from  intelligent  voters, 
■  who,  in  the  exercise  of  their  much  cherished  fran- 
chise, elected  intelligent  representatives  to  proceed 
to  legislative  halls  for  the  purpose  of  enacting  in- 
telligent laws  intended,  in  most  cases,  to  prevent 
insurance  departments  from  doing  anything  but 
collecting  increased  taxes. 

I,  therefore,  feel  that  my  thanks  are  due  to  Mr. 
Eldridge  for  the  clear  way  in  which  he  has  stated 
his  propositions  and  I  express  the  hope  that  it  will 
lead  to  future  reforms. 

The  paper  just  read  by  Mr.  Fouse,  entitled  The 
Legislative,  Actuarial  and  Official  Treatment  of 
Assessment  Life  Insurance  is  a  misnomer ;  the 
article  should  be  entitled.  An  Attack  on  the  Net 
Premium  Valuation  System  of  Life  Insurance,  and 
an  Attack  on  State  Supervision. 

The  statement  that  State  Supervision  does  not 
go  beyond  the  period  of  organization  of  companies, 
is  not  a  fact,  as  witness  the  annual  examination  of 
the  statements  of  the  company,  the  additional  in- 
formation asked  in  the  several  States  by  the  com- 


471 

missioners,  and  the  examination  of  the  companies 
made  from  time  to  time. 

Mr.  Fouse  states  that  the  promoters  of  the  com- 
pany should  be  required  to  deposit  with  the  State 
at  least  $25,000  to  be  retained  by  it  as  a  guarantee 
until  the  assets  amount  to  $200,000.  No  company 
should  be  granted  the  privileges  of  doing  business 
until  they  had  deposited  at  least  $100,000.  The 
remarks  regarding  the  views  of  several  eminent 
men,  as  to  the  net  valuation  system,  seems  to  con- 
vey the  impression  that  because  these  authorities 
criticise  in  some  point  such  system  that  the  system 
is  wholly  wrong,  while  the  truth  is  that  the  critics 
of  the  system  had  reference  to  the  unfairness  in 
their  opinion  of  the  necessity  of  requiring  a  full 
reserve  on  the  first  year' s  premium,  when  such  a 
premium  is  as  a  rule  completely  used  up  in  the 
expenses  of  getting  the  business,  and  the  ex- 
penses of  management,  and  the  further  criticism 
that  such  valuation  should  not  be  the  test  of  in- 
solvency. In  other  words,  that  if  on  the  net  valua- 
tion system  it  be  found  that  a  company  was  im- 
paired, that  instead  of  putting  it  into  the  hands  of 
a  receiver,  that  it  should  be  permitted  to  continue 
in  its  old  business  while  discounting  new  ;  but  this 
is  a  very  different  thing  from  condemning  the  sys- 
tem in  its  entirety  and  advocating  the  gross  valua- 
tion system  as  recommended  by  Mr.  Fouse.     The 


472 

fact  that  American  Life  companies  have  failed 
under  insurance  state  supervision  does  not  imply 
that  the  legal  requirements  for  the  solvency  of  the 
companies  is  ''practically  rotten,"  the  words 
used  in  the  previous  paper.  Mr.  Fouse  does  not 
advocate  governmental  valuation  as  applied  to  as- 
sessment companies,  considering  it  a  farce,  which 
it  undoubtedly  would  be,  as  no  assessment  company 
could  comply  with  the  test.  It  is  contended  that 
a  company  should  value  its  policy  liabilities  on  the 
basis  of  its  own  experience.  If  it  be  a  new  com- 
pany upon  what  experience  would  it  value  ?  If 
five  or  ten  years  old,  upon  what  basis  ?  It  would 
seem  as  if  the  idea  was  that  the  company  should' 
have  the  right  to  value  its  liabilities  upon  any 
basis  that  the  several  managements  thought  would 
fit  their  own  cases,  show  their  solvency,  and  prob- 
ably a  surplus  in  addition.  The  paper  assumes 
that  the  present  mortality  tables  are  hypothetical 
and  are  not  based  upon  actual  insurance  experi- 
ence, for  it  recommends  that  the  mathematical  re- 
serve be  calculated  on  the  actual  insurance  ex- 
perience instead  of  on  the  present  hypothetical 
mortality  tables.  The  companies  and  their  ac- 
tuaries, have  always  supposed  that  the  mortality 
tables  instead  of  being  hypothetical  were  derived 
from  the  actual  experience  of  the  business  but  it 
appears  that  they  are  wrong. 


473 

It  is  suggested  that  if  the  policy  liabilities  of  the 
Fidelity  Mutual  were  valued  on  a  net  reserve  basis, 
the  reserve  would  be  $1,840,292.00  ;  if  on  the  gross 
basis,  $1,072,181.28.  I  assume  such  figures  to  be 
correct,  and  have  no  doubt  that  the  Fidelity 
Mutual  would  prefer  the  latter  method  of  valua- 
tion to  that  of  the  former.  But  this  method  of 
treating  a  company's  liabilities  is  a  good  deal  like 
a  financial  institution  which  discounts  long  paper, 
a^d  assumes  that  the  interest  charged  on  such 
loans  is  completely  earned  from  the  day  of  the 
discount,  even  though  the  customer  have  the  right 
to  come  in  subsequently,  pay  off  the  loan  prior  to 
the  maturity  and  claim  a  rebate,  or,  like  certain 
investment  companies  which  charge  a  bonus  for 
lending  money,  include  the  same  in  their  long- 
term  mortgage,  and  claim  it  to  be  the  profits  of  the 
year.  In  fact,  the  gross  valuation  suggested  by 
Mr.  Fouse  is  worse  than  any  of  these,  and  is  a 
deliberate  fraud  on  the  public,  taking  credit  for 
assumed  future  savings  on  the  interest,  mortality 
and  expense,  loading,  on  business  for  a  long  series 
of  years,  which  may  never  be  on  their  books  longer 
than  the  first  year.  In  short,  it  is  discounting  the 
future  for  the  benefit  of  the  management  and  to 
the  injury  of  the  public. 

Mr.  Fouse  says  ' '  three  millions  of  citizens  of  the 
United  States  hold  policies  of  insurance  to  which 


474 

the  State  standard  of  policy  does  not  apply."  How 
many  of  them  wish  that  some  test  as  a  basis  of  sol- 
vency had  been  imposed  that  would  save  them 
from  these  gross  abuses  of  standards  set  up  by  the 
companies  themselves. 

It  affords  me  much  pleasure,  in  discussing  a  paper 
on  fraternal  insurance,  to  be  able  to  agree  with  the 
writer  upon  some  of  the  points  mentioned  by  him. 
It  certainly  is  a  remarkable  fact  that  the  growth  of 
fraternal  organizations  has  been  so  rapid  with  suoii 
a  slight  expenditure  of  funds  for  the  purpose  of 
obtaining  new  business.  A  powerful  organization 
has  grown  up  side  by  side  with  Life  Insurance 
Companies,  binding  its  members  together  not  only 
with  the  ordinary  business  interests,  but  also  with 
those  fraternal  chains,  which  enable  the  organi- 
zations to  attain  such  a  growth  ;  it  is  a  matter  of 
congratulation  that  so  prominent  a  man  in  f  rater- 
nalism  as  Mr.  Warnock  should  seek  to  determine 
a  common  ground  or  standing  place  upon  which  to 
meet  the  professional  insurance  companies,  in  order 
that  the  business  of  which  he  is  an  exponent 
should  be  brought  to  that  condition  of  conservatism 
and  science  which  alone  can  guarantee  a  future. 
It  was  with  a  good  deal  of  pleasure  that  I  noted  a 
vague  suggestion  of  the  necessity  for  reserve  accu- 
mulation ;  because  to  the  best  of  my  knowledge  and 
belief,  this  is  the  first  time  that  any  officer  of  a 


475 

fraternal  society  has  made  public  acknowledgment 
of  the  fact  that  '^ new  blood"  and  kindred  catch 
words  would  not  prevent  the  eventual  dissolution 
of  this  society.  I  felt  sure  that  at  last  we  were  on 
the  right  track,  but  my  hopes  were  dashed  to  the 
ground  when  I  noted  that  Mr.  Warnock  was  not 
content  to  accept  the  reserve  standards  of  present 
actuarial  calculations,  but  preferred  to  get  up  some- 
thing of  his  own,  which  he  dignified  by  the  name 
**  reserve."  From  what  I  have  seen  of  the  records 
kept  in  the  office  of  fraternal  organizations,  it 
seems  to  me  that  the  statistics  which  could  be 
compiled  therefrom  would  scarcely  justify  the 
labor  and  expense  attendant  upon  a  compilation 
of  a  new  mortality  experience.  Half  a  loaf  may  be 
better  than  none,  but  when  it  comes  to  the  question 
of  the  sufiiciency  of  the  reserve,  half  a  step  for- 
ward brings  us  no  advance  whatever.  Half-way 
measures  are  useless  ;  we  must  look  the  question 
squarely  in  the  face,  and  if  we  are  to  place  frater- 
nal insurance  upon  a  firm  and  secure  basis,  let  us 
do  it  once  for  all,  and  not  be  compelled  to  revise 
our  findings  in  five,  ten  or  fifteen  years.  I  don't 
know  why  fraternal  insurance  reserve  should  difter 
from  the  reserves  of  any  company  ;  the  lives  assured 
are  the  same  ;  the  methods  of  medical  selection  are 
certainly  in  favor  of  the  company  if  anything,  and 
the  only  difference  that  I  can  see  is  the   one   of 


476 

agency  expense,  to  which  I  have  already  referred, 
and  which  belongs  to  the  expense  portion  of  the 
premium  and  not  the  reserve  fund. 

Mr.  Warnock's  distribution  of  the  premium  into 
its  three  elements  was  a  decided  step  in  the  right 
direction,  but  there  are  two  of  them  which  seem  to 
me  to  be  inflexible,  and  do  not  permit  of  any 
variations  from  the  safe  standards.  The  other 
one,  the  expense  element,  is  undoubtedly  fluctuat- 
ing, and  dependent  upon  the  economy  with  which 
the  office  is  managed.  If,  by  reason  of  decreasing 
agency  expenses,  an  internal  administration  re- 
duced to  its  minimum  cost,  fraternal  societies  are 
enabled  to  furnish  insurance  at  a  cheaper  rate  than 
old  line,  assessment  or  stipulated  premium  com- 
panies,— they  are  certainly  filling  a  mission  and 
should  be  encouraged.  I  think,  however,  that  Mr. 
Warnock  is  worrying  himself  unnecessarily  over 
the  size  and  disposition  of  the  reserve  funds  accu- 
mulated by  the  level  rate  companies.  I  recall  no 
fraternals  who  suffered  to  any  extent  from  this 
error,  if  it  be  one,  in  fact,  the  boot  is  on  the  other 
f6ot,  and  a  large  slice  of  those  very  reserve  funds 
which  in  Mr.  Warnock's  opinion  are  such  a 
menance  and  danger,  would,  if  transferred  to  some 
of  the  fraternal  societies  render  more  easy  the 
sleep  of  the  executive  heads.  I  recognize  fully  the 
field  of  fraternal,  but  I  also  recognize  the  glaring 


477 

errors  which  have  been  committed  in  its  name,  and 
I  trust  that  the  awakening,  which  is  apparent  in 
many  quarters  will  result  in  a  decided  improve- 
ment.    In  the  words  of  my  report : 

"It  is  true  that  with  those  whose  new  member- 
ship continues  to  be  a  large  percentage  of  the 
whole  body,  the  annual  increase  in  amount  of 
assessment  is  very  gradual,  but  is  none  the  less 
sure,  and  when  the  period  arrives,  which  in  the 
very  nature  of  things  it  must,  that  the  individual 
payments  approximate  to  the  price  asked  for  in- 
surance by  regular  companies  which  guarantee  no 
increase,  the  new  membership  falls  off  and  healthy 
young  lives  drop  out.  Thereafter  the  increase  in 
assessments  become  rapid  and  the  society  soon 
comes  to  an  end,  leaving  many  moribund,  or  un- 
able to  protect  their  families  by  insurance  else- 
where. It  is  a  disgrace  that  the  laws  of  any  State, 
should  permit  the  promotion  of  such  incompetent 
schemes,  but  such  is  the  number  and  power  of 
these  societies,  and  the  ignorance  of  the  majority 
of  legislators  upon  technical  matters  that  the  in- 
surance departments  have  not  been  able  to  have 
their  protests  considered  and  are  remitted  to  such 
supervision  as  the  inadequate  statutes,  mostly 
passed  at  the  instance  of  these  societies  them- 
selves, upon  the  books  will  permit. 

It  is  also  true  that  in  the  larger  and  better  con- 


478 

ducted  of  these,  the  extravagantly  titled  manage- 
ments have  in  private  been  fully  alive  to  the 
dangers  confronting  their  societies  for  several 
years ;  but  this,  coupled  with  the  fact  that  no 
sufficient  remedies  have  been  applied,  give  ground 
to  the  fear  that  they  do  not  possess  sufficient 
power  to  bring  about  the  reforms  which  they  con- 
fess in  their  annual  congresses  to  be  necessary. 
It  is,  therefore,  with  no  unfriendly  spirit,  sug- 
gested that  they  undo  the  vicious  legislation, 
which  they  themselves  have  accomplished,  and 
seek  the  assistance  of  legislators  in  passing  such 
laws  as  may  tend  to  compel  their  own  membership 
to  accept  such  changes  in  their  system  as  will  tend 
to  save  their  societies,  before  it  becomes  too  late. 
The  real  difficulty  of  the  situation  consists  in  the 
impossibility  of  convincing  the  common  member- 
ship, who  are  not  versed  in  insurance  problems,  of 
the  defects  of  their  system  and  its  intending  col- 
lapse, together  with  the  selfishness  of  the  older 
members,  who  are  generally  in  control,  and  ad- 
verse to  any  change  which  will  compel  them  to 
pay  their  fair  share  of  the  common  burden.  As 
the  legislature  created  these  societies,  it  becomes 
its  duty  to  see  to  it  that  they  are  properly  con- 
ducted. Fraternal  insurance  is  indestructible,  but 
the  system  under  which  most  of  it  is  now  done  is 
defective  and  doomed." 


479 
MILO  D.  CAMPBELL  : 

It  is  too  patent  to  require  discussion  that  assess- 
ment life  insurance  companies  (Co-operative  or 
Fraternal),  cannot  without  an  accumulated  reserve 
perpetuate  their  existence. 

New  blood  stimulates  or  intoxicates  for  a  season, 
but  every  drop  of  new  blood  will  in  time  require  two 
for  its  own  rejuvenation  ;  and  the  quantity  of  a 
company's  new  blood  cannot  be  geometrically  in- 
creased through  the  years  of  many  decades. 

But,  whether  such  companies  are  to  be  con- 
demned or  not,  depends  upon  the  use  made,  and  to 
be  made  of  them.  If  intended  as  life  insurance 
companies  for  life,  they  are  perhaps  better  than 
nothing.  If  intended  as  life  insurance  companies 
for  a  few  or  for  a  term  of  years,  then,  if  proper 
selection  of  a  company  be  made,  the  insurance 
will  be  cheap  and  may  last  through  its  expect- 
ancy. 

We  are  coming  to  have  two  kinds  of  expectancy 
in  life  insurance  ;  one  being  that  of  the  insured  and 
the  other  that  of  the  company  insuring. 

The  expectancy  of  life  is  now  so  well  known, 
that  companies  profiting  by  it,  tabulate  it  with  al- 
most unvarying  accuracy,  base  their  contracts  upon 
it  and  codify  it  into  laws. 

With  almost  as  certain  accuracy  can  the  lifetime 


480 

of  an  assessment  insurance  company  with  uniform 
membership  be  determined  by  its  rates  and  its 
plans  of  insurance.  This  being  true,  why  is  it  not 
the  duty  of  the  State  to  make  known  the  prospects 
of  an  insurance  corporation  if  it  be  organized  upon 
a  plan  that  cannot  perpetuate  itself  ? 

Assessment  insurance  is  not  necessarily  wrong  in 
conception.  It  has  features  that  might  well  be 
utilized  by  legal  reserve  companies,  and  thus  per- 
haps lessen  premiums  in  the  early  years  and  pro- 
vide for  contingencies  that  cannot  be  foreseen. 
"  The  wrong,  if  not  the  crime  that  has  been  per- 
mitted, is  in  false  representations.  Companies 
have  been  allowed  to  sell  life  insurance  and  to  in- 
duce the  belief  that  they  were  organized  upon  an 
unfailing  plan,  while  insurance  departments  have 
known  with  almost  absolute  certainty  that  the 
companies  could  not  outlive  their  oldest  members. 

It  is  easy  to  understand  how  the  war  between 
assessment  and  legal  reserve  companies  has  caused 
insurance  departments  to  shrink  from  the  conflict. 

There  is  not  so  much  wrong  in  post-mortem  as- 
sessment or  stipulated  cheap  rate  companies  if  they 
are  stamped  or  tagged  in  such  manner  that  the 
public  may  know  just  what  they  are. 

Assessment  insurance,  both  co-operative  and  fra- 
ternal, will  live,  but  it  will  be  upon  better  rates  and 
more  enduring  plans  than  are  now  common. 


481 

Would  it  not  be  well  to  give  insurance  depart- 
ments the  power  to  fix  the  time  and  prescribe  the 
corporate  existence  of  new  insurance  companies, 
within  constitutional  limitations,  and  to  fix  such 
limits  upon  the  plan  and  rates  proposed  by  the 
company  ? 

Let  such  terms  be  limited  to  five,  ten,  fifteen  or 
any  number  of  years  within  the  constitutional 
period.  If,  at  the  end  of  its  term,  the  company 
shows  sufficient  vigor  for  re -incorporation,  such 
may  be  easily  done. 

The  experience  of  the  past  year,  the  crumbling 
structures  of  a  hundred  associations  about  us,  the 
alarm  that  is  sounded  from  within  the  companies 
themselves,  the  appeal  that  comes  to  us  from  tens 
of  thousands  of  members  who  have  been  carried 
beyond  the  insurable  period  and  stranded  without 
insurance,  all  demand  that  the  State  shall  prohibit, 
prevent  and  protect  by  its  laws  and  through  its  in- 
surance department. 

The  reserve  fund  sacred  to  mortality  alone  is 
the  foundation  of  an  insurance  company  building 
for  time.  All  other  foundations  are  of  sand.  But 
until,  in  many  of  the  States,  the  assets  and  reserve 
funds  of  life  insurance  companies  are  better  forti- 
ed  and  protected  than  they  are  at  present,  it  will 
be  difficult  to  secure  the  best  legislation  affecting 
assessment  insurance. 


482 

The  legal  reserve  companies  are  practically  a  law 
unto  themselves  in  the  management  of  their  assets. 
Many  of  them  have  accumulated  such  colossal 
sums  that  no  one  department,  National  or  State, 
should  be  vested  with  sole  supervision.  And  to 
that  part  of  the  excellent  paper  of  Mr.  Warnock 
advocating  national  supervision  I  do  not  concur. 
For  such  change  I  hear  no  demand  from  policy, 
holders.  It  would  create  a  centralization  of  power 
not  equalled  upon  this  or  any  other  continent.  If 
such  a  bureau  could  be  created  by  federal  law 
(which  is  doubtful),  then  it  seems  to  me  it  would 
be  far  better  that  federal  laws  be  enacted  curing 
the  ills  most  frequent  and  leaving  the  States  with 
supervision  and  home  control. 

But  again,  false  pretenses  and  baseless  promises 
are  not  alone  confined  to  assessment  insurance. 
When  the  old-line  companies  have  fulfilled  their 
tontine  promises  and  have  verified  the  examples 
printed  in  their  agents'  red  books  upon  which  they 
solicit  insurance,  when  their  investments  are  more 
carefully  guarded  from  speculation,  when  values  of 
real  estate  and  real  estate  securities  are  what  they 
seem,  when  nominal  surplus  becomes  actual  sur- 
plus, when  a  false  promise  becomes  as  much  a 
crime  as  a  false  pretense,  when  these  things  shall 
be  enforced  or  punished  as  justice  may  require  in 
legal  reserve,  and  honesty  in  assessment  insurance, 


483 

then  will  the  State  and  its  insurance  department 
have  fulfilled  their  duty  to  the  public. 

An  assessment  company  collecting  a  reserve  for 
mortality  purposes  should  have  its  policies  valued 
periodically  upon  some  recognized  table  of  mor- 
tality. If  found  deficient,  an  assessment  should  be 
ordered  to  make  good  the  reserve  at  once. 

The  reserve  element  of  every  premium  should  be 
definitely  fixed,  and  to  use  it  otherwise  or  divert  it 
to  any  other  purpose  should  be  made  a  statutory 
crime. 

At  present  almost  any  kind  of  a  concern  may  in- 
corporate and  start  out  as  an  insurance  organiza- 
tion. The  State  grants  the  charter,  and  so  long  as 
its  officers  keep  out  of  the  penitentiary,  it  demands 
protection  from  the  State  and  its  insurance  bureau, 
no  matter  what  may  be  its  prospects.  It  requires 
no  prophet  or  soothsayer  to  predict  the  events  of 
failure  a  ad  consequent  disappointment  in  the  field 
of  assessment  insurance  within  the  next  few  years. 
Some  companies  are  trying  to  cure  their  past  mis- 
takes ;  a  few  will  succeed,  others  are  too  far  gone 
for  help. 

The  question  presented  to  us  is  one  of  great  im- 
portance. Not  how  we  can  perpetuate  promoters 
and  officers  of  such  companies  for  a  few  years  more 
in  office,  but  how  we  can  serve  half  a  million  policy- 
holders in  such  companies  who  are  being  flattered 


484 

and  cajoled  into  the  belief  that  they  have  life  in- 
surance for  life. 

Suffice  it  to  say  that  the  duty  of  the  State,  of 
which  we  are  the  representatives,  is  not  so  much  to 
devise  plans  as  it  is  to  protect  policy-holders 
against  deception  and  fraud.  It  is  not  so  much 
whether  the  annual  premium  rate  shall  be  five,  or 
fifty  dollars,  but  rather  to  place  the  stamp  of  the 
State  upon  an  insurance  company  and  to  let  policy- 
holders and  the  public  generally  know  what  the 
State  knows. 


WILLIAM  A.  FRICKE  : 

The  more  this  question  is  given  investigation 
and  discussion,  the  stronger  grows  the  conviction, 
that  it  was  a  mistake  to  ever  permit  a  distinction 
such  as  level  premium,  assessment,  and  fraternal, 
to  creep  into  the  statutes. 

That  assessment  insurance  has  done  much  good, 
and  has  also  carried  great  evil  in  its  train,  all  are 
agreed  on.  It  has  paid  millions  to  the  widow  and 
the  fatherless — stimulated  men  to  better  lives  and 
educated  them  to  the  necessities  of  life  insurance. 

It  has  also  left  thousands  upon  thousands  of  men 
without  protection  and  a  future  of  grim  despair 
and  want  for  their  loved  ones. 


485 

It  has  brought  home  to  these  thousands  and 
other  thousands  the  fact  that  the  business  of  life 
insurance  can  be  conducted  safely  only  by  one  of 
two  methods : 

1.  The  premium  must  be  sufficient  to  enable  the 
creation  of  a  reserve  sufficiently  large  on  each 
policy,  to  make  up  future  deficiencies,  or  equalize 
the  increasing  hazard  of  increasing  age  by  dimin- 
ishing the  liability  of  the  company  ;  or 

2.  The  premium  payments  must  be  an  increasing 
amount  to  at  all  times  cover  the  current  or  actual 
cost  according  to  the  attained  age  of  the  insured. 

This  being  true  it  will  require  wise  legislation  to 
save  that  which  is  good  and  prevent  evil  for  the 
future.  No  fair-minded,  honest  man,  desires  to 
injure  the  honest  assessment  association  or  fra- 
ternal order,  but  coining  new  names  and  grafting 
worse  laws  upon  bad  statutes  will  give  no  relief. 
We  must  go  back  and  undo  the  wrongs  of  legisla- 
tion which  made  possible  the  failures  of  the  past. 
Tirades  of  abuse  and  ridicule  will  do  no  good, — 
preaching  recognition  of  the  laws  of  mortality  and 
the  benefits  and  necessity  of  reserve  accumulations 
are  of  slow  growth.  The  mistakes  of  the  present 
plans  and  practices  can  be  corrected  without  injury 
to  a  single  honest  assessment  association  or  frater- 
nal order  by  the  enactment  of  the  following  as  a 
law: 


486 

"  The  commissioner  of  insurance  shall  annually 
value,  according  to  some  standard  table  of  mortal- 
ity, with  interest  not  exceeding  four  per  cent.,  the 
policies  of  all  companies  and  associations  organized 
in  this  .State,  and  of  all  companies  and  associations 
of  other  States  authorized  to  transact  business  in 
this  State,  unless  certificate  of  such  valuation  by 
the  insurance  commissioner  of  such  other  State  is 
furnished,  and  whenever  the  actual  funds  of  any 
such  company  or  association  are  not  of  a  net  value 
equal  to  the  net  value  of  its  policies  so  calculated, 
the  company  or  association  shall  be  prohibited 
from  issuing  any  new  policies  while  such  deficiency 
exists  and  the  commissioner  of  insurance  shall,  if 
necessary,  issue  an  order  upon  the  company  or 
association  to  make  good  such  deficiency  by  an 
assessment  upon  its  policy-holders." 

Such  a  law  would  not  injure  a  single  honest  com- 
pany or  association  transacting  the  business  of 
life  insurance. 

It  would  do  away  with  all  the  objections  to  the 
present  system  of  net  valuations  and  give  the 
policy-holders  added  protection. 

It  would  leave  to  each  company,  association  and 
fraternal  order  the  opportunity  of  giving  insur- 
ance at  less  cost  by  taking  into  consideration  those 
factors  which  experience  has  shown  can  absolutely 
be  depended  on  to  lower  the  premium.     It  would 


487 

bring  about  a  competition  in  economy  of  manage- 
ment which  of  itself  alone  will  mean  a  lower  rate. 
It  will  kill  off  the  fakes  and  frauds,  and  it  will 
give  to  the  honest  association  and  fraternal  order 
an  honest  name  and  standing  as  life  insurance 
organizations. 


HOW  TO  EXAMINE  A  LIFE  INSURANCE 
COMPANY. 

WM.  D.  WHITING  : 

IN  order  to  do  anything  effectively,  and  with  the 
least  expenditure  of  time,  labor,  friction  and 
expense,  it  is  necessary  to  know  from  the  outset 
pretty  nearly  what  is  to  be  done.  The  powers  and 
duties  of  insurance  commissioners  are  embodied  in 
the  statutes  of  the  several  States  ;  and  while  it  is 
obligatory  upon  them  to  see  that  these  statutes 
(and  income  instances  the  common  law)  are  en- 
forced, it  is  equally  their  duty  not  to  overstep^the 
powers  conferred  upon  them.  Therefore  the  very 
first  thing  to  do  is  to  make  yourself  familiar  with  the 
laws  of  the  States  conducting  the  examination.  It 
may.  sometimes  become  expedient,  however,  when 
the  State  laws  are  narrow,  in  order  to  make  an  ex- 
amination acceptable  to  other  departments  so  as 
to  minimize  the  number  of  examinations,  to  cover 
such  points  of  investigation  as  may  interest  other 
States  as  well. 


489 

The  requirements   of  an    examination   may  be 
generalized  as  follows : 
Financial  : 

(a)  Verification  of  sworn  statements  filed  with 
the  department. 

(b)  Subsequent  financial  changes  to  date  of  clos- 
ing examination. 

Legal : 

{a)  Compliance  with  general  statutes,  charter 
and  by-laws. 

(&)  Compliance  with  laws  regulating  invest- 
ments, deposits,  taxes,  notices,  surrender  values, 
discrimination,  &c. 

(c)  Compliance  with  contract  obligations,  pay- 
ment of  claims,  &c. 

Management : 

Peculation,  fraud,  waste,  peculiar  agreements  for 
compensation,  proxies,  &c. 

IS'epotism,  loans  to  officers,  directors,  &c.  In- 
sufficient rates,  selection  of  risks.  Misrepresenta- 
tion in  literature.  Sharp  practice  and  skinning 
claims,  surrender  values  and  dividends  to  tontine 
policy-holders.  Incompetency,  bad  investments 
and  methods. 

It  has  sometimes  been  questioned  whether  com- 
missioners have  the  right  and  power  to  go  into  this 
third  division,  and  to  comment  upon  points  of 
management.     There  is  no  doubt  that  in  this  di- 


490 

rection,  as  in  all  others,  such  power  may  be  abused 
or  exaggerated  unnecessarily  and  offensively. 
But  it  seems  to  me  that  this  power  is  a  necessary 
inference  to  the  requirement  that  the  ''  condition 
and  affairs"  of  the  company  shall  be  ascertained 
and  made  public.  Although  this  language  sounds 
in  the  present  tense,  for  all  purposes  of  life  insur- 
ance, so-called  present  conditions  can  only  be  as- 
certained by  discounting  future  events  ;  and  the 
present  solvency  of  a  company  means  not  alone  its 
ability  to  meet  outstanding,  but  also  future  claims. 
The  irend  of  its  management,  quite  as  much  as  its 
present  assets  are  involved  ;  for  although  now  com- 
mercially solvent,  a  continuance  of  present  man- 
agement may  mean  certain  ultimate  failure.  It 
should  also  be  borne  in  mind  that  the  leaning  of 
modern  legal  decisions  is  in  the  direction  of  taking 
from  individual  policy-holders  the  right  of  direct 
interference  in  a  company's  management  and 
towards  construing  this  power  as  having  been 
delegated  to  the  insurance  departments — this  has 
been  most  noticeable  in  regard  to  prayers  for  in- 
junction, mandamus,  and  accounting. 

Theoretically,  a  company  is  managed  by  its 
policy-holders  or  stockholders  through  their  own 
selected  Board  of  Directors,  and  they  have  the 
means  of  remedying  and  controlling  all  acts  of 
management ;  thereby  making  any  interference  in 


491 

acts  purely  managerial,  from  any  other  source,. an 
impertinence.  Such  is  the  general  attitude  of  the 
insurance  press  towards  the  departments.  But  as 
a  matter  of  well-known  fact  but  few  companies  are 
managed  in  this  way.  By  reason  of  the  proxy 
system,  the  great  extent  of  our  country,  and  nec- 
essary absorption  in  their  own  immediate  business, 
very  few  policy  or  stockholders  ever  attend  an 
annual  meeting  and  could  not  act  intelligently 
if  they  did,  unless  the  Departments  shall  from 
time  to  time  make  public  those  acts  of  bad  and- 
dangerous  management  which  cannot  be  reached 
by  statement  blanks,  even  when  truthfully  re- 
turned. 

Having  generalized  the  points  upon  which  in- 
formation is  desired  by  examination,  it  becomes 
necessary  to  arrange  a  systematic  plan  for  obtain- 
ing it.  A  most  important  item  to  this  end  is  the 
selection  of  the  examining  force  upon  which  all  the 
details  and  the  success  of  the  investigation  will  de- 
pend. Such  has  b^en  the  rapid  increase  in  the  de- 
mand for  examinations  of  insurance  companies  in 
the  past  ten  years,  both  as  regards  number  and 
thoroughness,  that  the  supply  of  competent  exam- 
iners has  not  kept  pace  with  the  requirements  ; 
making  it  a  matter  of  serious  difficulty  for  the 
smaller  departments  to  provide  themselves  with 
experienced  assistants.     One  consequence  has  been 


492 

that  in  many  instances  merely  accountants  and 
bookkeepers  have  been  employed,  whose  examina- 
tions have  consisted  of  little  more  than  a  counting 
of  assets  and  a  partial  verification  of  a  trial  bal- 
ance. A  glance  at  the  foregoing  analysis  of  in- 
formation necessary  to  be  obtained,  shows  that  a 
knowledge  of  actuarial  and  legal  matters  is  in- 
volved in  addition  to  that  of  an  accountant.  It 
has,  therefore,  been  found  desirable,  in  cases  of 
any  magnitude,  to  employ  actuaries,  lawyers,  ac- 
countants and  minor  clerks,  and  if  the  examina- 
tion is  a  small  one  which  does  not  justify  such  ex- 
pense, the  single  examiner  must  have  a  fair  knowl- 
edge of  all  three  branches  to  do  his  work  efficiently. 
This  is  equally  true  of  the  one  who  is  put  in  gen- 
eral charge  of  the  whole  force  of  a  large  examina- 
tion. Upon  him  falls  the  duty  of  assigning  and 
supervising  the  work  to  be  done  by  others  ;  of  re- 
ceiving their  reports,  and  of  selecting  and  mar- 
shalling all  the  essential  results  in  a  final  report  to 
the  commissioners  of  insurance*. 

Assuming  that  a  proper  force  has  been  brought 
together,  and  a  competent  actuary  put  in  charge, 
the  next  step  is  to  lay  out  the  work.  Unless  it  be 
desirable  for  certain  reasons  which  seldom  exist,  to 
spring  an  examination  upon  a  company  suddenly, 
it  will  be  found  of  material  assistance  to  request  it 
to  have  certain  schedules  made  out  in  advance  in 


493 

a  prescribed  manner  and  form,  and  furnished  on 
the  opening  of  the  investigation,  as  follows  : 

Copy  of  last  sworn  statement,  including  full  lists 
of  real  estate  owned  and  loaned  upon,  bonds  and 
stocks  owned,  collateral  loans  and  bills  receivable, 
policy  loans  and  premium  notes,  cash  deposits, 
agents'  balances,  deferred  and  outstanding  pre- 
miums, premiums  paid  in  advance,  death  and  en- 
dowment claims  and  instalment  and  annuity  claims 
unpaid,  and  surrender  values  and  dividends  un- 
lapsed. 

Each  list  to  be  properly  arranged,  with  such  in- 
formation as  past  due  and  accrued  interest  and 
blank  columns,  necessary  for  your  ultimate  pur- 
pose. 

I  have  found  it  most  convenient,  commencing  at 
the  beginning  of  the  copy  of  the  company's  last 
sworn  statement,  to  mark  each  item  thereof  with 
the  initials  of  the  assistant  who  is  to  verify  it,  re- 
serving some  of  the  more  particular  items  for  the 
examiner  in  charge.  The  appropriate  list,  above- 
mentioned,  can  then  be  handed  to  the  respective 
assistant  to  which  the  item  belongs,  and  the  whole 
force  be  put  to  work  immediately.  By  coupling 
each  of  your  assistants  with  an  appropriate  clerk 
of  the  company,  the  checking  can  be  expedited. 
With  a  little  skill  there  is  no  danger  in  thus  using 
a  company's  employee  to  call  off  the  lists  while 


494 

your  assistant  holds  the  original  data.  In  this 
way  also  your  assistants  are  less  apt  to  make  mis- 
takes of  their  own,  by  having  some  one  familiar 
with  the  data  at  their  elbow  to  make  suitable  ex- 
planations. 

The  commissioners  themselves  are  usually  on 
hand  about  this  time  and  may  want  to  participate 
in  the  work.  If  so,  the  item  with  which  they  are 
apt  to  be  most  familiar  and  can  do  the  most  good 
in  the  shortest  time-^they  are  generally  restless 
men — is  to  count,  and  check  the  list  of  bonds  and 
stocks  on  hand.  But  you  will  have  to  be  a  little 
particular  in  insisting  upon  a  careful  checking  of 
interest,  percentages  and  dates  ;  whether  any  past 
due  coupons  are  attached  and  a  correct  description 
of  the  securities  including  optional  payment  dates. 
Otherwise  you  are  sure  to  have  trouble  when  you 
come  to  make  up  over  due  and  accrued  interest 
and  market  values,  and  have  to  do  much  of  their 
work  over  again.  There  is  seldom  reason  for  tak- 
ing down  the  numbers  of  securities — unless  there 
is  ground  to  suspect  that  some  have  been  borrowed 
or  exchanged  for  the  occasion.  Even  then,  it  is 
easier  to  discover  such  a  trick  by  tracing  the  pay- 
ment for  securities  (and  other  important  assets) 
into  the  cash  book  and  calling  for  the  returned 
checks  and  other  original  evidences  of  purchase.  Of 
course,  even  this  may  be  frustrated  by  exchanging 


495 

checks  and  memoranda  of  sale  as  well  as  securities. 
But  such  a  transaction  will  be  of  recent  date,  as 
rogues  seldom  trust  each  other  long,  and  the  simil- 
arity of  dates,  amounts,  &c.,  and  discrepancy  in 
real  value  of  securities  apparently  sold  with  the 
sum  apparently  obtained,  together  with  the  general 
atmosphere  which  is  inseparable  from  people 
engaged  in  a  fraud,  will  awaken  your  suspicion  ; 
and  you  can  put  the  officers  separately  under  oath 
and  written  examination.  This  never  fails  to  bring 
out  the  true  inwardness  of  a  transaction.  When 
skillfully  done  it  has  all  the  efficacy  of  an  exam- 
ination of  witnesses  in  a  court  of  law,  and  I  have 
found  it  of  great  value  in  getting  at  facts  when 
there  existed  only  a  suspicion  to  go  upon  ;  and 
where  the  sifting  of  an  account  was  difficult, 
tedious  and  expensive.  I  once  succeeded  thus  in 
uncovering  a  gigantic  fraud,  which  sent  the  officers 
on  a  run  for  other  parts,  and  the  company  into  the 
hands  of  a  receiver,  which  had  defied  the  scrutiny 
of  books  and  papers  for  nearly  two  months.  I 
recall  a  very  creditable  entire  examination,  made 
by  a  lawyer  wholly  an  this  way,  assisted  by  an 
actuary  in  framing  his  questions  after  a  cursory 
examination  of  papers,  and  by  a  stenographer  in 
taking  down  the  answers  of  officers  and  clerks. 

The  different  lines  of  an  examination  are  of  un- 
equal lengths,  and  the  examiner-in-chief  should  so 


496 

arrange  matters  as  to  expedite  tliose  which  will 
consume  the  most  time  and  keep  his  whole  force 
employed  as  nearly  as  may  be  to  the  end.  For  in- 
stance, the  lists  of  real  estate  owned  and  loaned 
upon  must  be  checked  with  the  deeds  and  mortgage 
notes  by  the  attorney  employed ;  and  the  titles 
passed  upon.  A  separate  sheet  for  each  parcel 
will  have  to  be  prepared  containing  a  condensed  de- 
scription or  plot,  with  memoranda  of  the  office 
number,  book  and  folio,  where  recorded,  &c.,  in 
order  that  said  sheets  may  be  arranged  according 
to  localities  and  be  forwarded  to  someone  resident 
therein  for  appraisal,  and  to  ascertain  if  the  title 
still  remains  in  the  company  without  incum- 
brances. This  is  the  longest  item  of  examination 
ordinarily,  and  may  require  either  that  it  be 
started  before  the  general  investigation  begins,  or 
that  a  double  force  be  employed  upon  it.  Ordi- 
narily these  sheets  are  sent  to  the  Insurance  Com- 
missioners of  the  States  in  which  the  property  lies, 
as  they  generally  have  means  for  their  speedy  and 
inexpensive  appraisal  and  search  ;  besides  being 
interested  in  examinations  and  knowing  just  what 
s  wanted. 

Much  of  the  work  concerning  real  estate  can 
sometimes  be  curtailed.  Thus  the  certificate  of 
title  signed  by  well-known  law  and  record  firms 
and  title  companies  may  be  accepted  down  to  their 


497 

dates,  and  the  search  may  be  sometimes  limited  as 
from  the  date  of  a  previous  department  examina- 
tion. There  is  a  strong  presumption  in  favor  of 
small  properties  acquired  through  public  fore- 
closure if  the  papers  are  regular  ;  and  also  in  favor 
of  the  regularity  and  sujfficiency  of  a  mortgage 
upon  which  the  interest  has  been  paid  for  some 
years  with  an  acknowledgment  of  recent  date 
from  the  mortgagor  that  the  debt  is  still  out- 
standing. 

This  latter  is  especially  important  when  there 
are  a  number  of  farm  mortgages,  the  interest  upon 
which  is  collected  through  agents  who  likewise 
have  been  in  the  habit  of  placing  loans  and  receiv- 
ing the  principal.  Such  agents  have  been  known 
to  continue  interest  payments  to  the  company  long 
after  having  collected  and  pocketed  the  principal. 
A  fair  judgment  of  the  value  of  foreclosed  property 
may  sometimes  be  obtained  from  the  company's  re- 
cent sales  as  compared  with  cost  or  ledger  values. 
I  have  never  yet  found  the  deductions  necessary  to 
be  made  by  reappraisal  of  a  considerable  list  of  gen- 
eral mortgages  exceeded  the  amount  of  past  due 
interest  outstanding.  Besides,  it  should  be  borne 
in  mind  that  on  an  average  mortgages  have  about 
three  years  to  run  before  they  will  be  paid  off,  and 
carry  over  1%  more  than  the  average  general  rate  of 
interest  on  investments.  *  This  would  entitle  mort- 


498 

gage  investments  to  about  S%  premium  if  in  the 
shape  of  an  ordinary  marketable  security  ;  and  for 
which  premium  the  company  gets  no  credit  in  its 
statement. 

It  therefore  generally  occurs  that  by  omitting 
any  credit  for  past  due  interest  and  said  future  in- 
terest premium,  outstanding  mortgages  may  be  ac- 
cepted, as  a  whole,  at  their  face  without  incurring 
the  expense  and  delay  of  an  appraisal ;  and  in 
scarcely  any  event  is  an  appraisal  necessary  beyond 
those  parcels  which  indicate  weakness  from  local 
causes  or  non-payment  of  interest. 

Ordinarily  a  valuation  of  the  company's  policy 
obligations  as  of  the  date  of  the  last  sworn  report 
has  already  been  made  by  one  or  more  depart- 
ments. If  this  has  not  been  done,  it  should  be  in- 
stituted immediately,  on  account  of  the  length  of 
time  necessary  to  complete  it.  The  verification  of 
this  work  will  be  mentioned  later. 

The  work  all  having  been  laid  out  and  assigned 
to  dijfferent  assistants,  it  will  now  be  well  for  the 
chief  examiner  with  his  bookkeeper  to  compare  the 
trial  balance  of  last  December  31st  with  the  com- 
pany's sworn  statement  to  see  if  they  agree,  and 
what  items  of  the  ledger  liave  been  combined  or 
subdivided  in  making  up  the  statement.  It  will 
also  be  desirable  to  inspect  accounts  involving  profit 
and  loss  items   and   the   journal   closing   entries 


499 

for  the  year ;  in  which  places  attempts  at  trim- 
ming   accounts    for    making    public     statements 
are  apt  to    appear.     This  will  also  give    oppor- 
tunity to  become  familiar    with    the   company's 
system  of  books  and  method  of  bookkeeping.    The 
verification  of  the  trial  balance  itself  from  the 
ledger,  and  of  the  latter  from  the  various  books  of 
original  entry  (Cash,  Journal,  &c.),  and  the  justi- 
fication of  these  by  original  documents,  vouchers, 
&c.,  may  be  then  left  to  your  bookkeeper  and  ac- 
countant.    The  last  item,  comparison  with  original 
documents,  is  a  tremendous  undertaking  and  can- 
not be  fully  covered  within  the  limits  of  time  and 
expense  at  your  command  when  the  company  is  of 
any  size.     This,  among  other  things,  makes  it  im- 
portant that  examinations  of  all  companies  should 
be  made  within  intervals  of  say  three  to  ^ve  years, 
in  order  that  the  ground  to  be  covered  by  the  next 
examination  may  be  restricted  to  reasonable  limits. 
It  is  also  desirable  that  the  same  force,  as  near  as 
may  be,  shall  be  employed  upon  the  same  company 
on  account  of  the  familiarity  which  it  has  gained, 
through  previous  examination,  with  the  system 
and  affairs  of  the  company.     This  is  a  strong  argu- 
ment in  favor  of  each  department  making  the  ex- 
amination of  its  own  companies.  Fortunately  many 
of  the  items  of  receipts  and  disbursements  may 
be  so  closely  verified  by  balances,  estimates  and 


500 

comparisons  tliat  it  will  not  be  requisite,  as  to 
them,  to  call  for  original  documents  and  vouchers. 
For  instance :  if  the  total  amount  paid  for  sala- 
ries monthly  agrees  substantially  with  the  pay 
roll  and  fluctuations  are  explained  satisfactorily, 
the  amount  paid  for  medical  examinations  corres- 
ponding closely  with  the  new  business  written, 
and  commissions  paid  agents  follows  approxi- 
mately a  percentafije  of  the  new  and  renewal  pre- 
miums, it  will  not  be  necessary  in  general  to  exam- 
ine such  accounts  item  by  item.  The  same  may 
be  true  of  printing,  advertising,  and  a  lot  of  minor 
accounts,  when  the  amount  expended  has  been 
fairly  uniform  for  years  and  does  not  exceed  the 
percentage  usual  to  such  items  in  the  average  com- 
pany. Certain  items  may  also  be  checked  by 
balance — for  instance :  If  the  unpaid  claims  car- 
ried over  the  year  before  are  added  to  those  in- 
curred during  the  year,  and  from  this  is  subtracted 
those  paid,  compromised  and  dropped,  the  re- 
mainder should  equal  the  amount  of  outstanding 
claims  at  the  end  of  the  year.  For  instalment 
claims  interest  must  be  added.  Thus,  four  items 
of  the  statement  check  off  together.  It  is  un- 
necessary to  enlarge  upon  the  numerous  checks, 
balances  and  close  estimates  available  at  this 
point  of  an  examination,  as  they  are  generally 
known    to    the    departments    and    applied   upon 


501 

statements  as  tests  of  accuracy  when  they  are  filed 
annually. 

It  frequently  happens  that  the  examiner  can 
also  avail  to  some  extent,  of  the  work  done  by  the 
auditors  appointed  by  the  directors,  stockholders 
or  policy-holders  at  annual  meetings,  to  go  over 
the  accounts  of  the  management  and  verify  the 
books  and  annual  statement.  When  such  audi- 
tors, upon  your  inquiry  and  personal  examination, 
are  found  to  be  responsible,  independent  and  com- 
petent men,  their  reports  (with  the  foregoing 
checks,  balances  and  estimates)  may  be  of  value  in 
determining  the  extent  to  which  it  may  be  desir- 
able to  avoid  duplicating  the  work  they  have 
already  done.  It  should  likewise  be  remembered 
here,  that  the  officers  and  clerks  may  be  put  under 
oath  and  examined  personally  as  to  the  existence 
of  any  irregular  or  improper  items  being  included 
in  an  account. 

Certain  accounts,  however,  should  be  indepen- 
dently examined,  by  reason  of  the  information 
gained  therefrom  regarding  other  branches  of  the 
investigation.  Such  as  payments  of  claims,  sur- 
render values  and  dividends,  in  order  to  ascertain 
whether  paid  promptly  and  in  full,  and  whether 
illegal  discriminations  are  being  made.  It  will  be 
desirable  to  discover  whether  adjusters  are  being 
paid    on  the   basis  of    a  percentage  of   salvage, 


502 

whether  taxes  are  correctly  paid,  and  the  nature 
of  the  items  composing  *' legal  expenses"  and 
**  commuted  commissions."  Also  the  extent  and 
manner  of  payments  to  officers  and  Directors,  and 
whether  they  are  using  the  concern  for  personal 
loans,  as  a  dumping  ground  for  incompetent  rela- 
tives, or  in  aid  of  private  enterprises. 
.  Ledger  assets  have  all  been  listed  and  are  in  the 
hands  of  your  assistants  to  be  verified  by  inspec- 
tion of  original  documents.  ISTon-ledger  assets, 
such  as  interest  and  rents  due  and  accrued,  and 
market  values  over  (and  under)  book  values,  are 
best  made  out  upon  the  same  lists,  and  with  the 
aid  of  the  same  assistant  to  which  the  subject 
matter  belongs.  A  deduction  should  be  made  from 
interest  and  rents  accrued,  for  the  cost  of  collec- 
tion, and  also  for  any  amounts  paid  in  advance 
and  therefore  unearned.  Loans  on  policies,  pre- 
mium notes,  premiums  deferred  and  outstanding 
should  be  compared  with  the  department  valua- 
tion registers,  to  see  if  the  policies  upon  which  they 
occur  have  been  returned  as  in  force,  and  whether 
the  amounts  claimed  as  an  asset  are  sustained  by 
the  reserves  charged  against  the  policies. 

We  have  now  reached  in  regular  order  upon  the 
statement  blank,  the  division  of  liabilities,  the 
largest  item  of  which  is  the  reserve.  Besides  the 
incidental  checks  just  mentioned,  it  will  be  desir- 


603 

able  to  make  a  complete  comparison  of  the  com- 
pany's registers  of  policies  in  force  with  those  of 
the  department  ;  and  to  check  the  latter  again 
with  the  premium  receipts,  dividends  paid  and 
outstanding,  list  of  premiums  paid  in  advance, 
claim  and  surrender  value  payments,  and  those 
carried  as  a  liability,  to  a  reasonable  extent  ;  so  as 
to  be  satisfied  that  no  policies  in  force  have  been 
omitted,  nor  those  which  have  ceased  been  in- 
cluded. It  will  also  be  necessary  to  ascertain 
whether  policies  marked  off  as  lapsed,  and  not  ap- 
pearing in  the  list  of  those  entitled  to  a  surrender 
value,  ought  not  to  appear  as  extended  insurance. 
Mathematically  an  addition  of  about  1%  should 
be  made  to  the  reserve  on  account  of  the  pay- 
ment of  death  claims  before  the  end  of  the 
policy  year,  as  obtains  in  British  and  Continental 
statements  of  life  comj)anies. 

In  entering  up  unpaid  claims  an  estimate  should 
be  added  for  deaths  which  have  occurred  during 
the  calendar  year  for  which  notices  have  not  been 
received  on  December  81st.  The  basis  of  the  esti- 
mate is  derivable  from  previous  years'  experiences; 
but  when  the  examination  is  made  some  time  after 
December  31st,  the  actual  amounts  can  be  obtained 
from  the  claim-book  or  envelopes  in  which  matters 
relating  to  each  claim  are  kept.  This  procedure 
merely  follows  the  general  rule  that,  when  an  un- 


504 

disclosed  liability  actually  exists,  it  must  be  taken 
into  consideration  even  although  the  amount  must 
be  estimated.  The  company's  docket  will  be  of 
use  in  arriving  at  the  "resisted"  cases  together 
with  the  minutes  taken  from  your  examination  of 
''  legal  expenses  "  and  the  papers  contained  in  the 
claim  envelopes.  It  has  always  been  my  custom 
to  make  a  reasonable  deduction  for  cases  which  ap- 
pear to  be  properly  contested  ;  and,  in  general, 
after  allowing  for  costs  of  settlement  and  litigation, 
the  figures  come  out  remarkably  close  to  one-half 
the  face  of  the  resisted  claims. 

Liability  for  unpaid  dividends  should  include 
the  dividend  due  on  the  (assumed)  payment  of  out- 
standing and  deferred  premiums.  Liability  for  un- 
paid surrender  values  is  properly  subject  to  some 
discount  for  those  policy-holders  who  will  neglect 
to  apply  in  time  under  the  terms  of  their  policies 
or  statutory  limitations  ;  and  allowance  in  critical 
cases  should  also  be  made  for  the  probable  lapsing 
gain  to  be  derived  from  the  non-payment  of  out- 
standing and  deferred  premiums.  This  is  strictly 
logical,  as  we  deduct  all  excess  of  said  premiums 
above  reserves  upon  the  theory  of  loss  in  case  of 
non-payment ;  and  such  practices  are  not  antici- 
pations of  future  profits  as  they  relate  to  past 
annual  due-date  events.  Unpaid  bills,  fees,  etc., 
must  on  December  31st  be  largely  a  matter  of  esti- 


505 

mate,  based  on  past  experience  ;  but  when  the  ex- 
amination is  made  several  months  after  December 
31st,  accurate  amounts  can  be  obtained  by  analyz- 
ing the  cash  book  payments  to  ascertain  whether 
bills  since  paid  refer  to  obligations  outstanding  on 
said  date. 

An  eye  must  be  kept  open  throughout  the  ex- 
amination for  extraordinary  liabilities,  and  this 
will  generally  be  found  to  be  the  most  prolific  field 
for  discoveries.  It  will  sometimes  be  found  in  the 
direction  of  carefully  concealed  borrowed  money, 
important  lawsuits,  surrender  values  promised  in 
excess  of  reserves,  premiums  below  net  rates,  ac- 
cumulated tontines  which  cannot  be  used  by  the 
company  for  future  expenses  or  deficiencies,  special 
contracts,  suppressed  taxes,  &c.  In  order  to  catch 
such  matters,  it  will  be  desirable  among  other 
things  to  scrutinize  carefully  the  deposits  m  banks 
towards  the  close  of  the  year  to  see  if  any  ' '  cats 
and  dogs"  have  been  deposited  as  cash  ;  to  read 
carefully  the  policy  forms,  literature,  rate  books 
and  agents'  manuals  ;  peruse  all  so-called  private 
letter  books  which  contain  correspondence  concern- 
ing the  company's  business  not  intended  for  the 
clerks  to  see.  Remember  that  when  an  officer 
puts  a  company  letter  into  his  personal  letter  book, 
that  book  becomes  the  property  of  the  company, 
by  his  own  act.     It  will  also  be  well  to  run  down 


506 

the  Insurance  Law  Journal  to  note  the  frequency 
and  character  of  the  litigations  in  which  the  com- 
pany has  been  concerned,  the  last  few  years  of 
which  may  be  still  unsettled — I  have  found  valu- 
able hints  in  these  decisions. 

Having  brought  the  financial  part  of  the  ex- 
amination down  to  the  preceding  December  31st, 
it  becomes  necessary  to  go  through  the  subsequent 
business  to  the  date  of  closing  the  investigation,  in 
a  general  way,  to  ascertain  whether  anything  out 
of  the  ordinary  course  of  routine  business  has 
occurred.  This  will  usually  consume  but  little 
time,  as  you  and  your  assistants  have  become 
familiar  with  the  books  and  methods  and  will 
already  have  covered  much  of  this  ground  in  other 
ways.  You  should  require  your  assistants  to  fur- 
nish you  with  a  written  report  of  each  distinct  part 
of  their  work  as  soon  as  completed. 

We  have  now  ascertained  the  company's  surplus 
on  a  net  premium  hasis^  which  merely  means  that 
it  has  so  much  to  spare  without  anticipating  any 
future  profits,  provided  that  future  mortality,  in- 
terest and  expenses  sustains  the  assumption  con- 
tained in  the  net  premium,  reserves,  loading  and 
gain  from  lapses.  We  can  only  judge  of  the  suffi- 
ciency as  to  this  important  future  proviso  by  ascer- 
taining the  present  trend  of  the  company.  If  it 
shall  be  found  that  the  management  is  carefully 


507 

selecting  its  risks  and  investments  by  its  current 
gains  from  mortality  and  interest,  that  its  expenses 
are  kept  within  the  contributions  therefor  and  that 
it  is  protecting  itself  against  lapsing  by  a  sufficient 
surrender  charge  or  the  reverse,  the  facts  are  en- 
titled to  be  noticed  as  a  necessary  element  bearing 
upon  the  company's  ability  to  carry  out  its  con- 
tracts and  as  to  whether  the  above  net  premium 
surplus  can  really  be  spared  or  is  an  unsafe  as- 
sumption. The  ^ain  and  loss  exhibit,  introduced 
into  the  blanks  three  years  ago,  is  the  only  source 
from  which  this  information  can  be  analytically 
derived,  and  should  be  carefully  checked  by  the 
examiner-in-chief.  I  have  used  it  since  1876  in 
examinations,  not  only  for  the  above  purpose,  but 
as  a  general  check  upon  the  accuracy  of  state- 
ments. 

The  second  division — legal — of  the  examination 
will,  of  course,  be  conducted  contemporaneously 
with  the  financial  division,  and  principally  by  the 
examiner-in-chief  during  periods  when  not  en- 
gaged with  his  assistants.  I  have  found  it  most 
convenient  to  read  and  make  notes  from  the  gen- 
eral insurance  statutes,  the  charter  and  by-laws, 
board  minutes  and  those  of  principal  committees 
in  the  order  named. 

This  will  bring  together  the  legal  limitations 
upon    the    company's    powers  and  its   most  im- 


508 

portant  acts  in  chronological  order,  and  give  an 
exact  history  of  the  company.  Next  run  over  its 
investments,  deposits,  etc.  (subdivision  5),  to  as- 
certain that  these  have  been  made  with  due  com- 
pliance of  law.  It  will  then  be  desirable  to  take 
up  the  company's  contracts  and  literature  to  know 
just  what  it  has  promised  to  do  ;  the  performance 
of  which  can  be  ascertained  from  your  assistants. 
It  is  rarely  that  an  examination  fails  to  disclose 
some  breach  by  the  company  in  this  legal  division. 
On  account  of  its  general  character  and  intimate 
relation  with  the  other  divisions,  it  is  desirable 
for  the  examiner-in-chief  to  take  it  up  as  soon  as 
his  assistants  get  well  to  work  upon  their  assign- 
ments. 

The  third  division  of  examination — as  to  the 
character  of  the  management — is  practically  in- 
cluded in  and  covered  by  the  other  divisions,  and 
is  only  introduced  here  under  a  separate  head  for 
the  sake  of  analytical  completeness.  Whatever 
of  peculation,  fraud,  misrepresentation,  sharp 
practice,  waste,  incompetency,  etc.,  may  exist, 
will  have  been  developed  by  the  facts  disclosed  by 
the  financial  and  legal  investigations  mentioned. 
I  have  not  attempted  in  this  brief  paper  to  go  into 
minute  details  as  to  either  items  or  methods,  but 
rather  to  give  a  general  and  suggestive  sketch  of 
the  outlines  of  an  examination,  assuming  that  the 


509 

skill  of  the  examiner  will  be  sufficient  to  supply 
those  minor  points  which  could  hardly  be  referred 
to  herein  without  prolixity  and  confusion  of  the 
general  scheme.     Some 

GENERAL   REMARKS 

may,  however,  not  be  out  of  place.  Ordinarily, 
the  very  atmosphere  and  reputation  of  an  office 
will  direct  an  exi3ert  examiner  towards  its  weak 
spots,  enabling  him  to  concentrate  effort  in  the 
right  direction  and  to  judge  correctly  as  to  what 
may  be  omitted.  This  is  important,  as  he  rarely 
has  an  unlimited  supply  of  either  time,  men  or 
money  at  his  command  to  enable  him  to  go  ex- 
haustively into  every  nook  and  corner  of  past 
transactions.  Postponing  and  skinning  claims, 
high-priced  adjusters  with  salvage  commissions, 
and  borrowing  funds  are  a  sure  sign  of  embarrass- 
ment. Nepotism,  loans  to  officers  and  directors, 
compensations  other  than  salaries,  investment  in 
personal  enterprises,  generally  accompany  weak 
management.  When  the  management  is  either 
embarrassed,  weak  or  incompetent,  wrongdoing  is 
nearly  sure  to  be  found  somewhere.  It  is  generally 
wise,  when  a  supposed  defect  has  been  discovered, 
to  give  the  company  an  opportunity  for  explana- 
tion. In  this  way  an  inexperienced  examiner  will 
avoid  many  *' mares'  nests",  and  it  becomes  un- 


510 

necessary  to  exhibit  a  draft  of  your  report  to  the  com- 
pany before  engrossing  and  filing  it.  Remember  al- 
ways that  the  profession  of  examiner  is  not  only  one 
requiring  a  broad  range  of  experience  and  skill,  but 
is  eminently  one  of  trust.  You  will  learn  many 
things  that  are  in  the  nature  of  ''trade  secrets" 
and  ** personal  relations"  which  have  no  direct 
bearing  on  your  report,  and  should  be  considered 
as  '*  confidential  information  "  not  to  be  hawked 
about.  A  duty  is  likewise  imposed  to  make  the 
examination  as  economically  as  possible,  and  to 
avoid  the  temptation  of  unnecessary  protraction 
for  the  sake  of  fees.  It  is  also  well  to  bear  in  mind 
that  your  report  is  nearly  sure  to  be  attacked.  If 
it  bears  hard  upon  the  company,  it  will  criticise  it 
as  a  matter  of  self-defense  ;  if  otherwise,  the  com- 
pany's enemies  will  not  be  sparing  in  their  insinua- 
tions. If  both  attack  it,  as  sometimes  happens, 
you  may  console  your  conviction  that  examinations 
are  a  thankless  task,  with  the  sweet  reflection  that 
you  have  about  struck  it  right  on  that  job. 


BRADFORD  K.  DURFEE : 

The  examination   of  a  mutual  company  must 
cover  a  broader  field  than  that  of  a  stock  company. 


511 

Losses,  if  any,  in  a  stock  company  fall  upon  the 
stockholders,  and  the  main  point  in  an  examination 
of  such  company  is  not  to  its  methods  so  much  as 
to  its  solvency,  but  in  an  examination  of  a  mutual 
company,  it  is  as  necessary  to  examine  its  charter, 
constitution,  by-laws,  minutes  of  proceedings,  ap- 
plications and  contracts,  as  it  is  to  examine  its 
methods  of  bookkeeping  and  arrive  at  its  exact  in- 
come, disbursements,  assets  and  liabilities.      It  is 
not  a  question  of  its  present  solvency,  but  also  a 
question  as  to  whether  its  methods  of  doing  busi- 
ness are   of    such   a  character  as    to    reasonably 
promise  its  future  solvency.     The  register  of  death 
losses  should  be  compared  with  the  losses  paid, 
whether  paid  promptly  and  the  vouchers  therefor. 
Kesisted  losses  should  be  investigated    and   the 
reasons  obtained  for  refusal  to  pay.     The  amount 
of  insurance  written,  the  amount  marked  off  and 
the  amount  in  force  should  be  obtained.     Invest- 
ments should  be   carefully   inquired    into,    titles 
scrutinized  and  actual  cash  value  obtained,  com- 
missions to  agents,  salaries   of  officers,  and  other 
expenses  of  procuring  business  should  be  closely 
examined,  and  whether  economy  is  practiced  or 
otherwise  ;  the  policy  and  propriety  of  advances  to 
agents,  whether  any  officer  or  director  receives  any 
compensation  whatever  other  than  salary,  whether 
the    reserve    or  emergency  fund  is  sufficient    to 


512 

comply  with  the  law  ;  vouchers  should  be  produced 
for  all  expenditures  and  the  sufficiency  of  the  bonds 
of  those  handling  the  funds  inquired  into. 
Finally,  the  investigation  should  be  fair,  impartial, 
and  without  fear  or  favor,  bearing  in  mind  that 
unnecessary  adverse  criticism  that  would  injure 
the  association,  would  be  an  injury  to  the  members 
who  are  the  association,  and  perhaps  destroy  the 
faith  of  the  insured  as  well  as  rob  the  widow  and 
orphan. 


-..,;. 


Chapter  II. 


Fire  Insurance, 


FIRE  INSURANCE. 


JUDGE  D.  OSTRANDER  : 

THE  benefits  of  insurance  are  numerous  and  em- 
brace all  classes  ;  its  fundamental  idea  is  essen- 
tially socialistic.  It  contemplates  the  equalization 
of  a  class  of  misfortunes  to  whicli  all  are  subject. 
Property  owners  concede  something  of  their  re- 
serves for  mutual  relief  and  protection.  The 
underwriter  is  the  agent  or  middleman ;  he  col- 
lects premiums  from  the  many  and  pays  losses  to 
the  few.  While  only  a  small  portion  of  those  who 
pay  the  premiums  ever  receive  the  contingent  in- 
demnity promised,  all  are  incidentally  benefited ; 
all  are  relieved  from  the  apprehensions  of  a  pos- 
sible loss.  Anxiety  in  regard  to  an  unexpected 
and  unprovided-for  class  of  misfortunes  is  dis- 
sipated ;  statu  quo  is  assured  and  confidence  forti- 
fied. Now,  this  is  important,  for  it  promises  stabi- 
lity, and  out  of  this  promise  comes  the  courage 
and  the  assured  power  to  accomplish  great  enter- 
prises. Disasters  come,  but  they  are  repaired ; 
credit  is  undisturbed  and  a  long  train  of  compli- 


616 

cated  evils,  affecting  many  interests  and  many  per- 
sons, become  only  temporary  or  are  wholly  turned 
aside.  Without  the  guarantee  of  the  insurance 
office,  credit  would  be  restricted  and  every  busi- 
ness operation,  large  or  small,  would  require  a  re- 
serve capital,  something  withheld  from  the  ven- 
ture to  make  good  a  class  of  losses  which  are 
always  liable  to  befall.  Take  away  the  insurance 
policy,  and  the  limitations  of  the  business  man 
would  be  restricted,  timidity  would  take  the  place 
of  confidence,  and  thus  his  usefulness  would  be 
diminished.  Our  great  merchants  and  manufac- 
turers are  large  borrowers  of  money  ;  credit  exists 
only  by  confidence.  This  is  based  on  security. 
When  that  is  taken  away,  the  loan  will  be  with- 
held or  rates  of  interest  advanced  to  cover  the 
speculative  character  of  the  ventures. 

It  was  necessary  for  the  feudal  lord  to  have  a 
fortified  castle.  There  were  the  moat  and  the  draw- 
bridge, and  an  armed  force  to  protect  his  posses- 
sions against  marauding  and  unfriendly  neighbors. 
A  large  part  of  his  time  and  his  energies  were 
devoted  to  protecting  that  which  he  possessed. 

In  the  evolution  of  society  the  moat  and  the 
draw-bridge  have  disappeared,  and  under  the  pro- 
tection of  the  law  our  lives,  our  liberties  and  our 
property  are  found  to  be  reasonably  safe  from  the 
evil-doer ;  but  fire,  which  is  indeed  our  most  valued 


517 

friend  and  servant,  when  the  occasion  arises  defies 
the  law,  and  the  police  are  as  helpless  as  Brownies 
in  a  tempest.  Every  person  who  owns  perishable 
property  understands  this  disquieting  fact,  and  it 
is  understood,  too,  that  disasters  which  proceed 
from  fire  may  be  minimized  so  far  as  each  indivi- 
dual is  concerned,  by  co-operation  through  the 
insurance  office.  The  underwriter  is  more  than 
moat,  draw-bridge  and  police  combined.  "Experi- 
ence, however,  furnishes  many  instances  where 
protective  agencies  have  also  been  oppressive 
ones  ;  at  the  extremity  of  the  long  arm  stretched 
out  to  shield  a  people's  liberties  has  often  been 
found  a  greedy,  grasping  hand.  It  is  a  maxim 
that  "for  everything  we  have,  we  must  pay  the 
price,''  but  it  is  our  right,  and  sometimes  even 
our  duty,  to  inquire  whether  the  price  is  a  reason- 
able one.  If  we  would  be  relieved  from  anxiety  in 
regard  to  our  wealth  taking  the  wings  of  fire  and 
flying  away,  we  must  insure ;  but  what  about  the 
cost? 

I  have  seen  it  recently  stated  that  there  were  in 
the  United  States  one  hundred  thousand  insurance 
agents.  Behind  this  vast  army  of  "invasion  and 
occupation"  are  seen  in  dim  outline  the  shadowy 
forms  of  another  good-sized  army,  consisting  of 
generals,  major-generals,  brigadiers,  colonels,  ma- 
jors, captains  and  corporals  ;  and  still  farther  back, 


518 

in  the  deeper  shadows  is  seen  the  army  of  State 
supervision.  Every  one  of  those  who  make  np  the 
rank  and  file  of  these  several  armies,  oflScers,  sol- 
diers and  hangers-on,  whether  they  render  service 
or  notj  must  be  fed,  clothed  and  housed  at  the 
expense  of  the  commissary  of  the  policy-holder. 
It  is  probable  that  there  are  not  less  than  two 
hundred  and  fifty  thousand  persons  in  this  country 
who  are  chiefly  cared  for  in  the  management  of  this 
business. 

One  who  is  able  to  get  his  head  above  the  clouds 
and  calmly  survey  the  situation  will,  I  think,  find 
no  good  reason  for  encumbering  so  simple  a  business 
as  insuring  property  with  so  much  expensive  and 
complicated  machinery, — the  providing  and  ope- 
rating of  which  must  be  paid  for  by  those  who 
have  indemnity. 

Insurance  is  a  necessity  and  should  be  sold  for 
what  it  is  worth.  Nothing  should  be  added  to  in- 
crease the  cost  of  a  policy  that  is  not  required  to 
make  its  security  absolute.  The  expense  of  State 
supervision  and  the  annoyance  of  unwise  legislation 
can,  I  think,  be  done  away  with  and  much  com- 
plexity avoided  by  placing  the  control  of  the  insur- 
ance business  in  the  hands  of  the  general  govern- 
ment. While  insurance  may  not  be  commerce  in  a 
technical  sense,  it  is  no  less  an  interstate  business 
than  banking,  and  is  as  properly  a  subject  of  federal 


519 

regulation.  Let  Congress  devise  a  general  law  au- 
thorizing the  organization  of  companies  to  insure, 
and  provide  a  form  of  policy  which  will  be  proof 
against  the  intermeddling  of  forty  odd  State  legis- 
latures, with  strong  wills,  inexperienced  judgment 
and  crude  ideas,  and  many  of  the  difficulties  which 
now  exist  in  the  conduct  of  a  useful  and  indispen- 
sable business  will  I  think  soon  disappear. 

As  we  have  now  both  National  and  State  banks, 
so  we  might  have  both  !N'ational  and  State  insurance 
companies,  but  the  former  should  be  relieved 
wholly  from  State  control  and  supervision.  For 
the  better  protection  of  the  policy-holder,  the  na- 
tional companies  might  be  required  to  invest  their 
capital  in  United  States  bonds,  and  deposit  the 
same  with  the  government.  These  companies 
should,  of  course,  be  required  to  make  annual  or 
semi-annual  statements  of  their  business  to  the 
proper  department,  and  be  subject  to  examination 
as  in  the  case  of  banks.  This  can  be  done,  I  think, 
under  the  provisions  of  the  Constitution,  authoriz- 
ing Congress  to  legislate  for  the  ^'general  welfare  of 
the  United  States ^  The  interests  of  the  whole  peo- 
ple are  involved.  The  insurance  office  is  not  a  local 
institution,  it  is  as  ubiquitous  as  the  bank  ;  where 
property  exists,  there  is  also  indemnity  to  be  found. 

It  was  stated  by  Mr.  Justice  Field,  in  discussing 
the  case  of  the  County  of  Mobile  vs.  Kimball,  102 


520 

U.  S.,  696,  that  so  far  as  the  exercise  of  power  re- 
lates to  matters  which  are  national  in  their  charac- 
ter and  require  uniformity  of  regulation  affecting 
all  the  States,  the  power  is  exclusively  in  Congress. 

If  one  should  doubt  whether  insurance  is  a  means 
of  contributing  to  the  general  weKare  of  the  people, 
let  him  for  a  moment  consider  the  difficulties  that 
would  be  experienced  in  respect  to  both  domestic 
and  foreign  commerce,  if  insurance  was  withheld. 
A  few  persons  of  great  wealth  would  soon  control 
the  markets,  for  none  others  would  venture  where 
the  risks  were  so  great. 

There  are  subjects  concerning  which  both  the 
Federal  Congress  and  the  State  Legislatures  will 
have  power  to  act,  and  when  this  occurs  the  right 
of  Congress  in  case  of  conflict  will  always  be  para- 
mount. When  the  State  and  National  Legisla- 
tures act  independently  in  relation  to  the  same 
matters,  with  such  different  purpose  and  effect  as 
to  render  impracticable  the  enforcement  of  the 
separate  laws,  the  State  should  withdraw  its  action 
in  deference  to  the  superior  authority  of  the 
National  government.  If  this  is  not  done,  the  State 
legislation  must  be  treated  as  nugatory,  for  the 
general  government  is  supreme  when  acting  within 
its  constitutional  powers. 

The  word  "  Bank,"  I  think,  is  not  found  in  the 
Federal  Constitution,  yet  the  Supreme  Court  of 


521 

the  United  States  has  held  in  several  cases  that  the 
Congress  clearly  acted  within  its  implied  powers 
when  creating  our  national  banks.  The  Courts 
have  very  properly  reasoned  that  while  "  banks  " 
were  not  a  necessity  in  the  too  literal  meaning  of  the 
word,  they  were  a  convenience,  and  that  the  facili- 
ties they  afforded  approved  them  as  agencies  for 
promoting  the  general  welfare.  It  was  said  in 
McCulloch  vs.  Maryland,  4  Wheat.,  316  :  "Let  the 
end  be  legitimate,  let  it  be  within  the  scope  of  the 
Constitution,  and  all  means  which  are  appropriate 
and  which  are  not  prohibited,  but  consistent  with 
its  letter  and  spirit,  will  be  constitutional." 

See  also  Osborn  vs.  Bank  of  U.  S.,  9  Wheat.,  708, 
and  Farmers'  and  Mechanics'  National  Bank  vs. 
Bearing.  In  this  last  case  Mr.  Justice  Swayne 
said  :  "  Whenever  the  will  of  the  nation  intervenes 
exclusively  in  this  class  of  cases,  the  authority  of 
the  State  retires  and  lies  in  abeyance  until  a  proper 
occasion  for  its  exercise  shall  recur." 

Besides  the  necessary  expense  of  dealing  with  a 
large  number  of  State  departments,  having  differ- 
ent views  and  sometimes  making  demands  of  an 
unreasonable  and  vexatious  character,  it  has  fre- 
quently been  shown  that  State  Legislatures  have 
too  little  honesty  and  too  little  intelligence  to  safely 
deal  with  questions  of  so  much  importance,  requir- 
ing large  experience  and  expert  skill. 


522 

In  the  National  Congress  will  always  be  found 
men  of  larger  business  capacity  and  experience,  who 
will  understand  the  importance  of  this  subject  and 
be  able  to  consider  it  apart  from  petty  prejudice 
and  personal  interest.  It  is  not  that  the  regulation 
of  insurance  presents  so  many  difficult  questions  to 
the  Legislature,  but  that  it  should  be  freed  from 
the  intermeddling  of  persons  who  have  no  clear 
comprehension  of  its  necessities,  and  hence  are  un- 
able to  deal  with  it  understandingly.  It  is  seldom 
regarded  by  the  legislator  as  a  strictly  business 
proposition,  to  be  protected  as  such  and  controlled 
in  such  manner  as  to  increase  its  usefulness  to  the 
policy-holder,  without  detriment  to  capital  and  the 
permanent  interests  of  society.  Very  much  of  the 
vicious  State  legislation  has  proceeded  from  a  class 
of  very  small  statesmen  who  seek  to  magnify  their 
services  to  the  public  by  antagonizing  the  interests 
of  corporations.  They  ignore  two  important  facts  : 
first,  that  corporations  are  indispensable  to  the 
well-being  of  society  ;  that  they  are  made  up  of 
our  most  useful  and  public -spirited  citizens,  in- 
corporated for  the  purpose  of  uniting  their  capital 
and  their  strength  in  promoting  enterprises  of 
special  utility. 

An  absolute  monarchy,  it  has  been  said,  is 
better  than  the  tyranny  of  a  mob  ;  despotism  is  far 
more  endurable  than  anarchy ;   and  even  a  trust, 


523 

we  may  add,  with  its  orderly  and  conservative 
regulation  of  competition,  is  preferable  to  the 
waste  and  demoralization  which  proceed  from  the 
frequently  unwise  and  chaotic  efforts  of  both  legis- 
lators and  insurance  companies  to  manage  these 
affairs.  A  trust,  receiving  authority  from  an  act 
of  Congress  and  held  to  proper  restrictions  in  the 
regulation  of  its  affairs,  would  not,  I  think,  be  the 
worst  calamity  that  could  befall  either  the  insurance 
company  or  the  policy-holder.  Such  a  corporation 
could,  in  the  exercise  of  prescribed  powers,  abolish 
many  abuses  and  relieve  the  insuring  public  from 
the  payment  of  large  sums,  which  are  now  neces- 
sary on  account  of  the  badly  regulated  manner  in 
which  this  business  is  conducted.  A  trust,  with 
limited  powers  and  subject  to  congressional  con- 
trol, might  be  able  to  force,  with  a  strong  hand, 
an  intelligent  result,  something  which  has  been 
found  impossible  because  there  has  been  no  power 
to  unify  action.  Trusts  created  to  restrain  un- 
reasonable and  disastrous  competition,  as  they  are 
frequently  able  to  do,  and  to  give  a  steadying  and 
conservative  impulse  to  a  business  which  concerns 
all,  may  not  be  regarded  as  the  enemies  of  society 
or  opposed  to  the  best  interests  of  the  public. 

Second,  that  the  insurance  company  is  less  in- 
jured by  unfriendly  legislation  than  the  policy- 
holder ;  that  losses  are  uniformly  paid  from  income 


524 

and  not  from  capital ;  and  that  whatever  increases 
disbursements  makes  an  increase  of  income  in- 
evitable. Whatever,  therefore,  is  done  to  encum- 
ber the  insurer  will  unavoidably  increase  the 
cost  of  insurance.  Whatever  enters  into  the  ex- 
pense of  manufacturing,  such  as  rent,  taxes,  labor, 
interest  and  insurance,  increases  the  cost  of  the 
manufactured  product;  and  this  same  persistent 
law  of  economics  applies  with  exactly  the  same 
rigor  to  the  business  of  insurance  as  to  that  of  man- 
ufacturing. Every  charge  necessary  or  unnecessary 
to  which  it  is  subject,  every  burden  which  it  is  made 
to  bear,  must  ultimately  be  at  the  cost  of  those  who 
insure. 

A  very  large  item  of  expense  is  incurred  by  the 
underwriters  in  procuring  business.  The  best  in- 
terests of  both  the  insurer  and  the  insured  demand 
that  this  excessive  tax  should  be  reduced  ;  that  the 
vast  number  of  intermediaries  that  have  come  to 
exist  between  the  companies  and  their  patrons 
should  be  diminished.  There  is  no  greater  necessity 
for  procuring  business  by  solicitation  in  insurance 
than  in  banking.  It  may  have  been  otherwise 
a  half  century  ago,  when  the  wasteful  system  was 
inaugurated,  but  it  is  so  no  longer.  In  this  respect 
there  should  be  an  early  departure — one  which, 
while  lessening  expense,  will  at  the  same  time  add 
to  the  dignity  and  character  of  underwriting. 


526 

The  entanglement  of  fire  insurance  with  un- 
skilled and  irresponsible  solicitors  largely  increases 
each  year  the  volume  of  losses.  The  interest  of  the 
insurance  solicitor  is  frequently  opposed  to  that  of 
his  company  ;  his  advantage  is  often  found  in 
withholding  instead  of  disclosing  the  bad  features 
of  the  risk.  More  than  one-half  of  all  incendiary 
fires  refer  directly  to  a  want  of  judgment  or  a  want 
of  conscience  in  taking  the  risk.  Valued  policy 
laws  would  be  found  innocuous,  if  this  work  was 
done  honestly  and  intelligently. 

Moral  hazard  created  by  reckless  underwriting 
adds  in  losses  from  $60,000,000  to  $75,000,000  every 
year,  in  the  United  States,  an  amount  greater  than 
the  entire  annual  output  from  all  the  gold  mines  in 
this  country.  This  sum  must  be  added  to  the 
premium  paid  for  our  policies. 

It  will  be  found  that  the  rates  of  the  insurance 
office  increase  or  diminish  in  exact  proportion  as 
its  losses  and  expenses  are  large  or  small,  for  solv- 
ency must  be  maintained  and  competition  will  pre- 
vent large  profits.  The  business  of  insurance  for 
the  last  forty  years  has  not  been  largely  remunera- 
tive ;  the  leading  companies,  those  that  have  sur- 
vived the  great  conflagrations,  have  been  able  to 
pay  less  average  profit  than  capital  employed  in 
more  conservative  enterprises  has  realized,  and 
when  account  is  taken  of  the  very  large  number  of 


626 

companies  (more  than  four  times  the  number  of 
those  now  existing)  that  have  failed,  involving  losses 
of  many  millions  of  dollars,  it  is  extremely  doubtful 
whether  a  single  dollar  of  profit  has  been  realized 
on  the  entire  business.  This  is  not  an  encouraging 
showing,  and  clearly  indicates  that  there  are  radi- 
cal defects  in  the  system  of  management.  While 
I  am  of  the  opinion  that  a  policy  of  insurance  costs 
too  much,  it  is  very  clear  that  there  can  be  no  re- 
duction of  premium  until  there  is  also  a  reduction 
of  expenses  and  moral  hazard. 

This  can  be  done  in  several  ways — first,  by  dis- 
pensing with  solicitation  and  doing  the  business  at 
the  office  of  the  company  instead  of  doing  it  on  the 
street.  In  making  this  important  change,  which 
imports  the  abandonment  of  a  long-established  cus- 
tom, it  might  be  necessary  to  offer  patrons  the  ad- 
vantage of  a  small  discount,  when  the  application 
is  made  and  business  is  transacted  at  the  agent's 
office.  This,  I  think,  would  attract  nearly  all  de- 
sirable customers  to  seek  the  agent  instead  of  wait- 
ing to  be  sought  by  the  solicitor.  The  advantage 
gained  by  the  applicant  would  be  a  cheaper  insur- 
ance and  the  benefit  of  having  the  business  at- 
tended toby  more  capable  persons,  who  are  the  direct 
and  responsible  representatives  of  the  insurer.  The 
latter  would  be  relieved  of  the  responsibility  and 
expense  of  an  intermediary,  who,  while  somewhat 


627 

increasing  the  volume  of  premiums,  has  done  more 
to  degrade  the  character  of  underwriting  and  to 
create  distrust  and  contention  than  all  other  causes 
combined. 

The  agent,  when  relieved  from  the  labor  of  seek- 
ing the  business  by  the  methods  now  employed, 
would  be  better  remunerated  by  a  commission  of  10 
per  cent,  than  by  the  compensation  now  made. 
By  this  change,  the  insurance  company  would  be 
relieved  of  a  large  number  of  zealous  but  unprofit- 
able servants,  and  thereby  be  saved  an  important 
item  of  direct  expense.  They  would  also  be  saved 
from  many  bad  risks  and  much  moral  hazard. 

The  relations  of  the  agent  to  his  company  should 
always  be  those  of  confidence,  and  this  can  be  best 
secured  by  recognizing  in  his  compensation  the 
principle  of  co-operation  to  the  extent  of  making  a 
portion  of  his  pay  for  service  contingent  on  the 
profits  of  the  business  done.  This  proposition  I 
regard  as  fundamental,  and  one  that  cannot  be 
safely  ignored  in  the  management  of  any  important 
business,  where  responsibilities  are  distributed.  It 
refers  to  that  which  is  basic  in  all  business  affairs. 

Every  company  that  insures  on  the  basis  of  too 
high  a  valuation,  or  insures  unproductive  property 
at  all,  places  a  temptation  before  the  owner  to  be- 
come an  incendiary.  It  may  be  admitted  that  a 
majority  of  persons  are  so  deeply  rooted  in  moral 


628 

principle  that  their  conduct  will  not  be  consciously 
influenced  by  this  class  of  considerations  ;  the  pos- 
sibility of  gain  by  realizing  on  their  policies  will 
create  no  motive  for  criminal  action  ;  but  it  should 
be  remembered  that  the  best  of  persons  are  not 
wholly  unselfish,  and  when  the  circumstances  affect- 
ing their  property  are  such  that  its  destruction  will 
bring  them  gain  instead  of  loss,  they  will  not  ordin- 
arily put  forth  the  same  measure  of  exertion  for  its 
protection.     Special  care  and  watchfulness  are  im- 
portant in  respect  to  all  hazards.     When  this  is 
withdrawn,  the  chances  are  greatly  increased  that 
the  property  will  burn.     When  the  insurance  can- 
cels the  personal  interest  of  the  owner  in  the  risk, 
a  moral  hazard  immediately  attaches,  and  when  we 
reflect  how  often  this  is  done,  it  should  not  occasion 
surprise  that  fire  losses  are  very  large  and  the  rates 
of  premium  are  in  consequence  very  high.     But  our 
prisons,  our  criminal  courts  and  our  police  force 
emphasize  the  fact  that  all  persons  are  not  honest, 
and  experience  has  taught  us  that  very  many  per- 
sons do  insure  for  profit  and  not  for  protection. 
Suppose  the  number  of  such  is  not  more  than  one 
in  three  hundred  of  those  who  insure,  and  that  not 
more  than  one -third  of  the  losses  are  caused  by 
fraud  and  evil  practice — this  is  certainly  a  very  con- 
servative estimate — and  yet  the  loss  sustained  by 
fraud  will  be  enormous. 


529 

The  waste  of  physical  wealth,  although  it  may 
amount  to  $75,000,000  each  year  in  the  United 
States  alone,  is  unimportant  compared  with  the 
moral  and  social  debauchery  produced,  when  such 
waste  is  the  result  of  fraud.  Many  persons  have 
moral  force  sufficient  to  enable  them  to  overcome 
all  ordinary  temptations ;  if  this  were  not  so,  our 
civilization  would  rest  upon  an  unsatisfactory  foun- 
dation ;  but  there  are  others,  and  I  need  not  teJl  yon 
that  the  number  is  very  large,  who  are  not  stal- 
warts in  anything  ;  they  do  not  buttress  society 
with  their  strong  wills  and  an  inflexible  purpose 
to  do  right  though  the  heavens  fall.  They  are  not 
necessarily  vicious  persons,  and  without  tempta- 
tion are  most  frequently  fairly  good  citizens.  Un- 
der favorable  environments  their  characters  crys- 
tallize into  forms  of  usefulness  ;  but  in  the  unstable 
and  formative  periods  are  easily  influenced  into 
downward  courses. 

To  persons  of  this  class,  the  revelation  that  they 
can  dispose  of  an  undesirable  property  to  the  in- 
surer at  a  profit  will  always  be  a  temptation  to  do 
wrong,  to  enter  upon  criminal  courses  and  in  the 
end  to  become  the  recognized  enemies  of  society. 
It  is  easy  to  understand  the  specious  reasoning 
that  will  lead  such  persons  to  take  the  first  step  in 
a  life  of  crime.  There  is  something  even  plausible 
about  it,  and  it  may  often  be  convincing  to  ona 


530 

whose  moral  pliilosophy  has  weak  or  broken  links, 
whose  ideas  of  right  and  wrong  have  not  distinct- 
ness and  rigor,  whose  character  is  not  firmly  based 
upon  the  rock  of  Eternal  Justice.  The  tempted 
may  think  of  himself  as  a  poor  man  and  pressed  in 
his  affairs,  which  may  often  be  true,  and  he  may 
think  of  the  insurance  company  as  being  rich  ;  that 
the  benefits  to  him  are  comparatively  large  and  the 
injury  to  the  insurer  comparatively  small,  and  then 
he  may  think,  too,  what  matters  it  whether  the  fire 
is  by  accident  or  design,  that  the  loss  to  the  insurer 
will  be  no  greater  in  one  case  than  in  the  other. 
There  is  no  door  through  which  one  may  pass  from 
virtue  to  vice  with  a  better  satisfied  feeling,  and 
that  such  is  the  case  makes  the  seduction  the  more 
dangerous.  When  conscience  once  abdicates  its 
throne  by  consenting  to  wrong,  its  infiuence  over 
the  soul  is  forever  gone. 

Arson  is  a  very  grave  crime,  and  he  who  has 
committed  it,  we  may  understand,  will  ever  after 
remain  an  unsafe  member  of  society.  Between  him 
and  a  criminal  life  the  fences  are  broken  down,  and 
thenceforth  he  will  be  a  proper  subject  for  the  sur- 
veillance of  the  civil  authorities.  ''Lead  us  not 
into  temptation  "  was  the  prayer  of  the  Divine 
Nazarene.  The  utterance  of  this  petition  empha- 
sizes the  obligations  with  which  we  are  charged,  in 
this  respect,  to  the  performance  of  our  business  and 


631 

social  duties.  No  one  can  be  held  guiltless  who 
knowingly  causes  his  fellow  to  be  less  honest  and 
less  faithful  as  a  citizen  than  he  otherwise  would 
have  been.  Notwithstanding  the  strong  protecting 
arm  of  the  insurance  company,  notwithstanding  the 
timely  aid  it  has  brought  and  is  still  bringing  to 
hundreds  of  thousands  who  are  crushed  with  unex- 
pected misfortunes,  notwithstanding  the  confidence 
and  stability  it  has  given  to  commerce,  the  strength 
with  which  it  has  uplifted  the  fallen  and  the  fidelity 
with  which  its  many  vast  obligations  have  been  per- 
formed, it  must  be  regarded  as  a  curse  instead  of  a 
blessing  if  its  methods  are  such  as  to  increase  crime 
and  lower  the  tone  of  public  morality.  That  this 
evil  exists  and  has  reached  alarming  proportions,  no 
intelligent  person  who  is  familiar  with  the  adjust- 
ment of  loss  claims  will  dispute,  and  the  remedy  is 
not  difficult  to  find.  The  local  agent  is  the  corner- 
stone of  the  insurance  business  ;  he  is  the  source  of 
all  premium  income.  He  selects  the  company's 
risks,  determines  the  amount  to  be  written,  and 
fixes  the  terms  of  the  contract.  When  this  is  done 
with  skill  and  good  faith,  the  company  will  be  pro- 
tected and  there  will  be  no  ''moralities  shrieking 
aloud."  The  agent  must  not  only  be  conscientious 
in  discharging  his  duties,  but  he  must  also  be  well 
informed.  He  should  be  familiar  with  values  and 
understand  the  moral  character  and  business  habits 


532 

of  his  patrons.  When  this  is  not  possible,  the  ven- 
ture should  in  all  cases  be  refused. 

Many  agents  are  fully  qualified  to  perform  the 
duties  to  which  they  are  appointed  ;  their  discrimi- 
nation in  the  choice  of  risks  is  made  with  judg- 
ment and  with  a  high  sense  of  business  honor.  It 
is  the  service  of  this  class  of  agents  that  saves  the 
business  from  utter  disrepute  and  demoralization. 

It  is  with  another  and  distinctly  different  class  of 
agents  that  the  principal  difficulty  is  experienced. 
They  are  destitute  of  many  qualifications,  moral 
and  intellectual,  which  are  essential  to  success. 
They  fail  to  understand  the  important  distinctions 
between  that  which  is  good  and  that  which  is  bad, 
both  in  respect  to  the  character  of  the  applicant 
and  of  the  property  they  insure.  These  agents  en- 
gage in  the  insurance  business  with  no  ambitious 
ideals  ;  their  judgment  of  a  risk  will  be  influenced 
by  the  profit  it  will  bring  them.  The  worse  the 
risk  and  the  larger  the  line,  the  greater  will  be  the 
commission.  No  property  to  them  is  uninsurable, 
when  the  owner  can  x)ay  a  premium.  It  is  in  agen- 
cies of  this  kind,  where  the  moral  hazard  is  disre- 
garded, that  incendiarism  is  invited,  encouraged 
and  developed.  It  is  here  that  underwriting  is 
brought  into  discredit  and  that  an  exasperated  pub- 
lic sentiment  is  formed  that  finds  hostile  expression 
in  legislation  and  in  the  judgments  of  the  Courts. 


533 

Some  years  ago  a  request  came  to  me  from  a 
prosecuting  attorney,  living  in  one  of  the  Middle 
States,  that  I  confer  with  him  immediately  concern- 
ing a  gang  of  incendiaries  that  he  had  by  some 
means  uncovered.  I  found  in  his  possession  two 
affidavits,  disclosing  the  names  of  many  scoundrels, 
with  a  carefully  prepared  statement  of  their  opera- 
tions during  the  several  years  of  their  confederated 
existence.  In  this  list  of  rascals  were  the  names  of 
several  church  members,  one  banker,  one  wholesale 
merchant,  and  several  insurance  agents.  This  busi- 
ness had  been  carried  on  in  some  five  or  six  differ- 
ent States,  and  had  resulted  in  the  destruction  of 
property  to  the  value  of  several  hundred  thousand 
dollars  and  the  violent  death  of  two  persons,  one  of 
whom  had  been  murdered  to  prevent  disclosures. 

Such  systematic  schemes  of  arson  and  plunder, 
whether  large  or  small,  would  not  be  possible  if 
capable  and  conscientious  persons  only  were  selected 
to  represent  companies  in  their  local  business. 
Primarily,  of  course,  the  insurance  companies  are 
mainly  responsible  for  the  conditions  here  referred 
to.  They  should  not  be  content  with  the  service  of 
incompetent  and  dishonest  persons  in  the  manage- 
ment of  their  local  offices,  and  if  no  one  but 
the  insurance  companies  was  involved  in  the  shame 
and  disastrous  consequences,  there  would  be  less 
occasion  for  the  public  to  discuss  the  matter,  and,  it 


534 

is  probable  too,  that  the  evil  would  soon  find  correc- 
tion ;  but  it  is  true,  as  I  have  before  remarked,  that 
losses  are  paid  from  premiums,  and  that  rates  must 
be  made  sufficient  to  cover  losses  and  expenses, 
whether  or  not  the  losses  are  legitimate  or  the  ex- 
expenses  reasonable.  Every  neglect  of  duty,  every 
mistake  in  accepting  risks  and  every  unnecessary 
disbursement  in  the  management  of  the  business 
will  ultimately  be  an  increased  charge  to  the  policy- 
holder, and  that  which  creates  a  moral  hazard,  it 
must  be  remembered,  is  an  injustice  to  persons  who 
do  not  insure  as  well  as  to  those  who  do. 

The  person  who  sets  his  property  on  fire  because 
it  is  excessively  insured  may  cause  the  destruction 
of  buildings  and  merchandise  that  are  not  insured, 
together  with  the  buildings  and  merchandise  that 
are.  Methods  of  business  that  stimulate  crime  af- 
fect detrimentally  the  entire  community.  We  can- 
not multiply  one  class  of  criminals  without  adding 
to  the  catalogue  of  all  others.  The  malaria  that 
poisons  the  blood  and  enfeebles  the  system  prepares 
the  way  for  a  hundred  diseases,  differing  in  type 
and  character.  So,  too,  when  the  moral  forces  are 
subjugated  by  the  perpetration  of  a  particular  crime, 
vice  and  depravity  will  manifest  itself  in  many 
different  forms. 

The  most  direct  and  natural  remedy  that  may  be 
offered  by  the  underwriters  is   in  reforming  the 


535 

agency  system.  Many  of  tlie  companies  insuring 
would  doubtless  cheerfully  co-operate  in  any  prac- 
ticable scheme  that  would  reduce  the  expenses  and 
lessen  the  moral  hazard  of  insurance,  but  there  are 
many  others  who  have  never  been  governed  by  pru- 
dent counsel,  and  whose  only  guide  is  necessity. 
Like  the  freebooters,  they  are  a  law  unto  themselves 
and  the  enemies  of  legitimate  business. 

No  plan  of  reform  can  be  satisfactory  in  its  oper- 
ation that  does  not  embrace  in  its  obligations  and 
restrictive  provisions  every  company  competing  for 
business.  This  cannot  easily  be  secured  by  mutual 
compact.  The  only  relief  then  that  will  be  perma- 
nent must  come  by  legislation.  A  policy  having 
the  force  of  law,  providing  that  in  the  event  of  a 
total  loss,  when  fire  originates  on  the  premises,  the 
company  shall  in  no  event  be  liable  for  a  sum  greater 
than  80  per  cent,  of  the  actual  value  of  the  property 
destroyed,  would  substantially  indemnify,  establish 
a  conservative  rule,  practically  eliminate  moral  haz- 
ard, reduce  the  cost  of  insurance  40  per  cent.,  pro- 
tect society  from  dangerous  criminal  tendencies 
and  save  a  vast  amount  of  property  burned  every 
year  through  fraud.  No  one  would  be  wronged  by 
such  a  policy  ;  on  the  contrary,  every  one  would  be 
benefited,  even  the  rogues,  for  the  motive  being 
withdrawn,  they  would  be  deterred  from  perpetrat- 
ing a  crime  second  only  to  that  of  treason  and  mur- 


536 

der.  Such  a  law  would  undoubtedly  be  constitu- 
tional, as  it  would  clearly  come  within  the  police 
power  of  the  State. 

The  world  has  ever  held  in  abhorrence  the  wreck- 
ers who,  by  false  lights,  have  lured  ships  to  their 
destruction  on  shoals  and  rocks.  If  manhood  and 
personal  integrity  are  of  greater  value  than  ships 
and  merchandise,  then  is  our  offense  greater  than 
theirs,  for  we  have  even  incorporated  into  our  laws 
and  made  it  a  detestable  part  of  our  system  of 
business  to  lead  men  from  the  honest  walks  of  life, 
by  perpetually  placing  before  them  a  temptation  to 
the  commission  of  crime. 

But  few  persons,  not  connected  with  the  settle- 
ment of  loss  claims,  have  such  means  of  information 
as  will  enable  them  to  realize  the  extent  of  incen- 
diarism, particularly  in  the  middle,  southern  and 
western  States.  There  is  no  other  crime  of  such 
atrocity  so  easily  perpetrated,  and  none  that  offers 
a  richer  or  more  certain  reward.  The  agencies  for 
burning  property  are  so  numerous  and  of  such  a 
character  as  to  make  detection  most  frequently  im- 
possible. By  reason  of  the  often  unfriendly  char- 
acter of  juries  and  other  obstructions  which  insur- 
ance companies  usually  encounter  in  their  efforts  to 
convict  this  class  of  criminals,  they  find  it  more  to 
their  advantage  to  pay  the  loss  and  leave  the  punish- 
ment of  the  incendiary  to  the  civil  authorities,  and 


537 

there  the  matter  generally  ends.  Probably  not  one 
incendiary  in  fifty  is  made  to  suffer  for  his  crime. 
This  immunity,  for  which  both  the  authorities  and 
the  insurance  companies  must  share  the  responsi- 
bilities, has  tempted  a  large  number  of  persons 
from  honest  lives  into  criminal  courses. 

Organized  gangs  of  this  class  of  criminals,  it  is 
well  understood,  have  operated  extensively  in  all 
the  large  cities.  They  have  also  found  a  profitable 
field  of  activity  in  the  smaller  towns  and  country 
districts.  From  these  agencies,  a  vast  amount  of 
property  has  been  needlessly  destroyed.  A  policy 
which  would  limit  the  liability  of  the  insurer  to  80 
per  cent,  of  the  sound  value  of  the  property  de- 
stroyed, when  the  fire  originates  on  the  premises, 
would  have  the  effect  to  make  these  criminal  ven- 
tures unprofitable,  and,  what  is  more  important,  in 
taking  away  from  those  whose  moral  forces  are 
weak  the  temptation  to  do  wrong,  the  business  of 
insurance  and  the  State  will  be  relieved  of  a  scan- 
dal, and  the  better  interests  of  our  civilization  will 
be  permanently  advanced.  Persons  who  are 
charged  with  the  responsibilities  of  making  and 
executing  the  laws,  and  persons  who  are  charged 
with  the  responsibilities  of  managing  vast  business 
interests,  should  have  no  narrow  visions  of  duty. 
To  their  clients,  to  their  constituents  and  to  all 
others,  whose  higher  good  is  involved,   they  are 


538 

bound  by  the  strongest  obligations  to  so  act  that 
the  social  contract  shall  not  be  impaired,  and  that 
the  moralities,  which  are  its  beams  and  braces, 
shall  not  be  weakened.  As  men  of  business  affairs, 
we  are  here  to  build  up  manhood  and  justice,  and 
not  to  break  them  down.  There  are  two  classes 
which  can  always  be  relied  upon — the  good  and  the 
bad ;  but  there  is  another  class,  and  a  very  large 
one,  composed  of  persons  who,  when  called  to  act, 
always  hesitate  between  that  which  is  right  and 
that  which  is  wrong. 

Large  sums  are  unnecessarily  expended  every  year 
for  field  work,  both  in  the  inspection  of  risks  and 
the  adjustment  of  losses.  I  must  not  be  understood 
that  this  work  is  unimportant : — without  frequent 
and  intelligent  inspection  and  eminent  skill  in  the 
settlement  of  claims,  failure  in  the  conduct  of  this 
business  would  be  inevitable  ;  but  it  is  not  economy 
to  employ  an  army  of  high-priced  men  to  travel  up 
and  down  the  country,  disbursing  for  railroad  fares 
and  hotel  bills  hundreds  of  thousands  of  dollars, 
when  the  work  they  are  appointed  to  do  and  the 
information  it  is  their  purpose  to  obtain  can  be 
done  and  procured  at  a  cost  not  exceeding  10  or  15 
per  cent,  of  the  sums  actually  expended. 

From  the  office  of  the  Commissioner  of  Insurance 
of  the  State  of  Wisconsin,  I  find  that  there  were 
one  hundred  and  fifty -three  fire  insurance  com- 


539 

panies  doing  business  in  Wisconsin  during  1897, 
and  I  find  elsewhere  that  companies  doing  a  large 
business  employ  in  that  State  continually  three 
special  agents  and  adjusters,  others  employ  two  and 
some  only  one.  A  comparatively  small  number, 
whose  business  is  unimportant,  have  not  found  it 
necessary  to  keep  employed  in  that  field  a  special 
agent  and  adjuster  more  than  one-half  of  the  time. 
For  the  purpose  of  this  illustration,  we  will  sup- 
pose that  the  average  employment  of  each  company 
for  inspection  and  adjustment  was  only  one  person, 
receiving  a  salary  of  $2,500  and  traveling  expenses, 
which  would  amount  to  $1,500  more.  On  these  two 
items  alone  we  have  a  disbursement  of  $612,000, 
which  is  equal  to  14  per  cent,  of  the  total  premiums 
received  in  Wisconsin  during  1897.  But  this  work 
of  inspection  and  adjustment,  as  we  have  said,  must 
be  done,  and  can  it  be  done  at  a  less  cost  ?  Un- 
doubtedly ;  but  how  ?  There  are  several  ways.  The 
Factory  Association,  which  is  a  combination  of  be- 
tween twenty  and  thirty  of  the  leading  insurance 
companies,  representing  capital  to  the  amount  of 
$100,000,000,  has  demonstrated  the  practicability 
of  procuring  a  very  high  character  of  inspection,  of 
a  single  class  of  risks,  by  simple  and  direct  methods, 
with  a  small  percentage  of  cost  to  each  company 
interested.  This  system  can  easily  be  extended  to 
embrace  every  class  of  insurable  risks.     The  person 


540 

who  surveys  mills  and  factories  can  also  with  the 
same  critical  judgment  survey  hotels,  stores,  ware- 
houses, and  in  fact  every  kind  of  hazard,  which 
companies  are  accustomed  to  accept.  The  twenty- 
odd  companies  in  the  Association  may  designate 
to  make  inspections  one  competent  person,  who  is 
an  expert  in  any  particular  department  of  the  busi- 
ness, instead  of  each  of  the  several  companies  send- 
ing its  own  special  agent,  who  in  a  majority  of  cases 
would  have  less  skill  and  involve  to  the  companies 
in  the  aggregate,  and  to  the  policy-holder  ultim- 
ately, a  great  multiplication  of  expense. 

This  plan  offers  one  very  satisfactory  solution  of 
the  inspection  and  rating  problems  ;  but  there  is 
another  plan,  which  differs  only  in  detail  and  in  the 
fact  that  it  has  no  co-operative  feature,  which  may 
be  more  satisfactory  to  some  of  the  companies. 
We  have  had  for  a  long  time  our  commercial 
agencies,  such  as  Bradstreet's  and  Dun's.  The 
merchant,  the  manufacturer  and  many  other  classes 
of  people,  whose  affairs  have  important  relations  to 
credit,  would  experience  much  embarrassment  with- 
out these  auxiliaries  of  trade.  It  is  an  affair  of  far 
more  difficulty  to  ascertain  the  reliable  facts  con- 
cerning a  person's  financial  responsibility  than  to 
make  a  careful  inspection  of  the  physical  conditions 
of  his  property.  A  system  of  inspection  and  rating, 
conducted  in  a  manner  resembling  that  of  these 


641 

commercial  agencies,  would  suffice  to  furnish  the 
insurance  manager  with  the  information  necessary 
to  an  intelligent  performance  of  his  duties,  at  a 
very  small  part  of  the  expense  now  incurred.  This 
bureau  of  information  could  collect  its  facts  through 
the  systematic  surveys  of  persons  having  such  spec- 
ial aptitudes  and  special  training  as  to  discover  the 
true  character  of  a  hazard  and  to  apply  just  rules 
of  value  and  compensation.  They  should  be  able 
to  make  accurate  estimates  of  the  cost  of  construct- 
ing buildings  and  of  computing  the  insurance  value 
of  both  internal  and  external  hazards.  The  rate 
thus  determined  would  express  a  logical  and  mathe- 
matical conclusion,  one  that  should  be  satisfactory 
to  the  insured  and  protective  to  the  insurer. 

Every  town  and  city,  so  far  as  the  underwriter  is 
concerned,  has  a  special  character,  and  every  risk 
is  more  or  less  affected  by  that  character.  This 
fact  is  seldom  fully  understood  by  the  special  agent, 
whose  brief  visits  relate  only  to  the  few  risks  in 
which  his  particular  company  is  interested.  The 
inspector  who  examines  every  building  from  top  to 
bottom  will  understand  many  things  in  regard  to 
both  the  general  and  the  particular  hazard  that 
will  be  often  hidden  from  the  inspector  of  any  sin- 
gle company. 

This  work,  it  is  obvious,  will  be  done  in  a  more 
satisfactory  manner  and  at  one -tenth  the  expense 


542 

by  the  "association"  or  the  ''bureau  of  informa- 
tion" than  by  individual  companies.  When  the 
rating  and  inspection  are  made,  they  can  be  printed 
on  sheets  and  furnished  in  convenient  form  for  the 
use  of  subscribers.  More  special  and  confidential 
reports  could  be  had  ''on  application  to  the  of- 
fice," such  as  the  moral  and  business  character  of 
the  persons  who  own  the  property. 

For  several  years  a  number  of  the  largest  com- 
panies have  classified  their  risks,  in  view  of  ascer- 
taining with  greater  precision  on  which  the  profit 
or  loss  is  made.  Supplementing  a  uniform  and  in- 
telligent inspection  or  survey,  these  classifications 
afford  the  only  accurate  and  scientific  basis  for  the 
rate  which  each  risk  should  bear.  The  data  se- 
cured in  this  manner  by  a  large  number  of  com- 
panies, during  a  series  of  years,  will  have  an  im- 
portant value  only  in  the  hands  of  persons  who  are 
expert  and  competent  to  deal  with  the  nebulosities 
of  insurance.  The  agent,  no  matter  how  intelligent 
he  may  be,  if  his  experience  is  limited  to  a  single 
locality,  will  seldom  be  able  to  apply  this  concrete 
knowledge  in  such  a  manner  as  to  produce  definite 
and  available  results.  We  should  have  for  our  gui- 
dance in  the  conduct  of  this  business  a  scientific  and 
systematic  classification  of  the  facts  which  our  con- 
crete experience  has  developed.  Without  this,  we 
shall  profit  nothing  by  the  lessons  we  have  learned. 


643 

In  towns  and  cities  there  are  frequently  many- 
agents,  some  of  whom  are  good,  others  indifferent. 
There  will  always  be  found  those  who  are  ambitious 
to  thoroughly  understand  their  business.  These, 
in  most  cases,  will  succeed  in  mastering  the  compli- 
cated problems  presented ;  but  when  agents  are 
called  to  consider  as  a  board  the  matter  of  rating, 
there  will  be  found  conflicting  interests.  The  wise 
and  the  level-headed  will  be  opposed  by  the  foolish 
and  those  having  personal  objects  to  promote,  and 
instead  of  an  intelligent,  just  and  scientific  rating, 
we  shall  find  a  patchwork  of  inanities  and  fraud. 
Upright  and  capable  agents  there  are  many  ;  these 
are  deserving  of  our  highest  respect  and  protection, 
and,  it  will  be  agreed,  are  entitled  to  pursue  their 
business  without  being  entangled  and  inter-related 
with  an  irresponsible  mob,  who  have  no  conceptions 
of  duties,  the  performance  of  which  is  likely  to* 
affect  prejudicially  their  personal  interests. 

The  law  in  Wisconsin,  giving  local  boards  ex- 
clusive authority  to  fix  rates  of  insurance,  is  unwise, 
impolitic  and  unjust.  It  ignores  the  experience  of 
those  who  bear  the  chief  responsibilities  of  the  in- 
surance business  ;  it  treats  as  nugatory  the  careful 
and  laborious  efforts  to  compile  data  through 
numerous  classifications  and  an  accurate  account  of 
premiums  received  and  losses  paid  on  different 
classes,  comprising  hundreds  of  thousands  of  risks 


544 

for  a  term  of  many  years,  evolving  by  mathematical 
processes  a  rate  that  should  be  just  to  all.  It  puts 
inexperience  on  the  same  basis  with  experience  ;  it 
puts  the  owner  of  property  often  in  the  hands  of  an 
unscrupulous  majority. 

For  illustration,  let  us  suppose,  at  Rock  Falls, 
Brown  was  the  only  agent ;  that  he  represented  a 
large  number  of  responsible  companies  ;  that  he  was 
a  person  of  superior  intelligence  and  had  conducted 
his  business  with  so  much  care  as  to  give  unquali- 
fied satisfaction  to  all.  After  years  of  diligence, 
Mr.  Brown  finds  himself  in  the  control  of  a  com- 
fortable business,  and  begins  to  dream  of  days  when 
his  toils  will  be  lessened  and  his  joys  increased. 
At  this  moment  there  arrive  in  Rock  Falls  two 
strangers,  Mr.  Getem  and  Mr.  Pickem,  and  they 
bring  with  them  the  agencies  of  several  companies 
of  that  kind  which  people  generally  prefer  not  to 
insure  with.  They  immediately  interest  themselves 
in  the  organization  of  a  local  board.  This  done, 
they  call  on  the  property  owners  and  inform  them 
that  their  buildings  and  merchandise  must  be  in- 
sured through  their  office  ;  that  the  two  agencies  of 
Getem  and  Pickem  constitute  a  majority  of  the 
local  board ;  that  the  power  of  rating  is  in  their 
hands  absolutely,  and  will  be  exercised  for  the 
benefit  of  their  patrons.  Now,  here  is  a  hold-up  as 
atrocious  as  any  that  ever  occurred  outside  of  the 


545 

City  Council  of  Chicago.  Mr.  Brown,  being  in  the 
minority,  can  do  nothing  to  protect  his  clients  ;  he 
is  helpless,  and  in  a  few  months  the  business  he  has 
established  by  his  intelligence  and  industry  will 
pass  into  the  hands  of  the  robbers,  who  have  se- 
lected him  for  a  victim. 

It  is  possible  for  an  outrage  of  this  kind  to  occur 
in  every  town  and  city  of  Wisconsin.  Those  who 
have  may  be  plundered  by  those  who  have  not, 
and  the  immolating  agency  is  the  legislative  power 
of  the  State.  Through  the  juggling  which  this 
plan  of  rating  invites,  the  worst  risks  are  liable  to 
find  favor  with  the  majority  of  the  local  board,  on  ac- 
count of  the  larger  amount  of  commissions  involved, 
and  thereby  obtain  the  benefit  of  lower  rates  than  are 
demanded  for  the  best  class  of  hazards.  The  effect 
of  legislative  interference  in  this  matter  has  been  to 
practically  exclude  from  rating  that  which  is  the 
basis  of  the  whole  undertaking — every  fact  of  exper- 
ience, every  conclusion  that  has  been  reached  with 
scientific  accuracy.  It  places  this  important  mat- 
ter in  the  hands  of  those  less  skilled,  whose  inter- 
ests, instead  of  whose  duty,  are  liable  to  influence 
their  judgment  and  determine  their  action.  An 
important  business  is  encumbered  with  incompe- 
tency and  fraud,  honest  persons  are  wronged,  and 
the  rogues  only  find  their  advantage. 

Reference  has  already  been  made  to  the  fact  that 


546 

the  business  of  insurance  has  not  been  largely  re- 
munerative ;  that  premiums  have  barely  paid 
losses,  while  dividends  have  chiefly  been  paid  from 
interest  account  and  the  profits  derived  from  invest- 
ments. Competition  has  always  been  active,  and, 
presumably,  will  continue  so.  There  are  too  many 
companies  in  the  field  seeking  patronage  to  make 
an  oppressive  monopoly  possible,  but  should  un- 
wise legislation  so  encumber  the  management  of  this 
business  as  to  discourage  ventures  and  cause  a  large 
amount  of  capital  to  be  withdrawn,  monopoly 
would  become  possible  and  obstructive  legislation 
become  the  direct  cause  of  that  which  it  was  in- 
tended to  prevent. 

The  retirement  of  a  company  is  of  frequent  occur- 
rence. This  it  may  do  when  the  outlook  is  dis- 
couraging, and  this  it  sometimes  must  do  to  protect 
its  capital.  Unlike  railroads,  and  even  large 
manufacturing  establishments,  which  have  millions 
permanently  invested  in  plants,  the  insurance  com- 
pany which  fails  to  win  success  may  re-insure  its 
risks,  close  its  doors  and  be  speedily  swallowed 
up  in  oblivion.  Whether  there  be  many  or  few 
companies  will  be  determined  always  by  the  law  of 
supply  and  demand.  If  the  number  of  companies 
is  too  few  to  afford  the  required  amount  of  indem- 
nity, rates  of  premium  will  advance,  for  companies 
will  not  extend  their  lines  beyond  a  conservative 


547 

limit  unless  they  are  tempted  to  do  so  by  a  large 
premium.  This  business,  like  all  others,  is  subject 
to  inexorable  law,  and  it  does  not  require  any  vast 
amount  of  astuteness  to  find  out  what  that  law  is. 
Capital  always  seeks  two  things — profit  and  secu- 
rity. It  will  venture  to  insure  when  one  or  both 
of  these  things  are  in  sight ;  when  they  disappear, 
it  will  close  its  venture  and  invest  elsewhere.  That 
which  restricts  the  insurer  as  to  the  most  intelligent 
and  practical  methods  of  managing  its  business, 
that  which  imposes  unnecessary  and  unreasonable 
burdens,  that  which  causes  the  destruction  of  prop- 
erty, by  creating  moral  hazard,  will  just  as  certainly, 
as  effect  follows  cause,  enhance  the  cost  of  insur- 
ance. If  the  valued  policy  law  in  any  particular 
State  increases  the  number  of  fires,  that  State  suf- 
fers a  double  loss,  the  waste  on  account  of  the  fire 
and  the  additional  premium  made  necessary  to 
reimburse  the  insurer.  The  insurance  company  is 
in  no  sense  a  partner  in  this  folly  ;  it  stands  to  the 
public  as  their  man  of  business,  who  pays  what  the 
law  directs  and  draws  on  the  parties  in  interest  for 
its  commissions  and  disbursements.  This  cannot 
be  otherwise  where  there  is  left  to  the  insurer  the 
ultimate  right  to  determine  the  rate  on  which  it 
will  issue  its  policy.  But  it  is  not  right  that  honest 
people,  when  procuring  insurance,  should  be  taxed 
to  pay  the  losses  occasioned  by  the  fraud  of  others  ; 


548 

but  it  is  so,  and  the  remedy  is  in  withdrawing  the 
motive  for  the  perpetration  of  this  class  of  ojffenses. 

The  evils  that  threaten  this  business  are  not  ob- 
scure, and  the  responsibility  of  finding  a  remedy 
rests  primarily  upon  those  charged  with  its  man- 
agement. There  is  a  nearness  of  cause  and  effect 
that  leaves  no  room  for  doubt  or  evasion  ;  there 
may  be  other  causes  farther  away  and  less  clearly 
defined.  These  do  not  so  much  concern  us.  The 
whooping  cough  and  the  measles  in  the  home  of  a 
neighbor  are  more  to  be  apprehended,  as  menacing 
the  health  of  our  families,  than  the  cholera  on  the 
distant  Ganges. 

The  greater  part  of  man's  education  is  obtained 
while  engaged  in  business  pursuits.  In  the  schools 
the  young  are  instructed  in  the  rudiments  of  learn- 
ing, but  the  greater  knowledge  comes  and  charac- 
ters are  chiefly  formed  in  the  experience  and  com- 
petitions of  life.  It  is  the  affairs  in  which  persons 
are  continually  engaged,  that  employ  their  moral 
and  mental  energies,  that  the  aptitudes  for  virtue  or 
vice  are  formed.  When,  therefore,  great  enter- 
prises are  so  conducted  and  legislation  is  so  framed 
as  to  cause  persons  to  be  less  upright  than  other- 
wise they  would  be,  an  irreparable  injury  is  done 
to  society,  and  the  moral  forces,  which  it  is  the 
purpose  of  the  schools  and  the  churches  to  create, 
will  be  broken  down  and  dissipated.     There  can  be 


549 

no  necessity  underlying  any  business  or  any  law 
that  is  so  imperative  in  its  character  as  to  justify 
a  departure  from  that  which  is  fundamentally 
right.  It  is  a  matter  of  the  highest  importance 
that  in  the  performance  of  our  business  obligations, 
absolute  integrity  should  be  preserved. 


FIRE  INSURANCE  RATES. 


A.  F.  DEAN  : 


IT  is  an'^open  secret  that  few  people  actively  en- 
gaged in  fire  insurance  have  more  than  a  super- 
ficial [acquaintance  with  practical  rating.  In  the 
division*of  labor  made  necessary  by  the  constant 
expansion  and  growing  complications  of  the  busi- 
ness, the  function  of  rate  making  has  gradually 
fallen 'into  the  hands  of  specialists  who  devote  their 
lives  to  this  work,  just  as  others  devote  their  entire 
time  to  inspections,  adjustments,  and  other  matters 
which  demand  specialized  knowledge.  Outside  the 
ranks  of  those  who  follow  fire  insurance  as  a  voca- 
tion, it  would  be  hard  to  find  a  person  who  had 
given  the  subject  sufficient  thought  to  even  inquire 
why  fire  insurance  is  eternally  at  sixes  and  sevens 
with  thelpublic  over  the  rate  question,  or  who  had 
the  slightest  idea  that  there  is  any  essential  differ- 
ence between  fire  rates  and  the  rates  of  other 
branches  of  the  indemnity  family  ;  but  there  is  a  dif - 


661 

ference,  vast  and  far-reaching  in  its  effects,  and  it  is 
this  : 

Fire  insurance  alone  attempts  to  measure  the 
hazard  of  each  individual  risk  and  fit  it  with  a  spe- 
cific rate.  In  life  insurance,  for  example,  a  stan- 
dard life  of  a  given  age  pays  the  same  rate  as  a 
million  other  similar  lives.  Each  life  is  merged 
with  its  class,  loses  its  identity  and  quality,  and  be- 
comes simply  a  quantitative  abstraction.  Fire  in- 
surance cannot  do  business  in  this  wholesale  man- 
ner. It  is  the  retailer  of  the  insurance  world.  It 
deals  in  broken  packages  and  it  must  test,  gauge, 
weigh,  measure,  estimate  and  name  specific  value  in 
each  of  its  transactions.  It  is  this  necessity  for  in- 
dividuation which  brings  us  in  contact  with  the  bar- 
gain counter  instinct  of  the  masses ;  which  loads 
upon  our  backs  the  burden  of  endless  detail  from 
which  other  branches  of  insurance  are  free.  It  is, 
in  fine,  this  necessity  for  individuation  that  cre- 
ates all  the  trouble  between  the  companies  and 
the  public  and  brings  me  before  you  to  discuss  fire 
rates. 

Admitting  the  radical,  perhaps  unavoidable  dif- 
ference between  fire  rates  and  the  rates  of  other 
branches  of  insurance,  it  is  in  order  to  inquire  what 
are  the  ingredients  in  a  fire  rate  ;  how  are  they 
ascertained,  combined  and  measured  in  dollars  and 
cents. 


552 

Physicists  account  for  the  infinite  diversity  of 
nature  by  the  theory  that  every  cause  produces 
more  than  one  effect.  The  fire  rate  reverses  this 
cosmic  law,  being  the  condensed  effect  of  an  infini- 
tude of  causes.  Like  the  pot  aufeu  of  the  thrifty 
French  housewife,  in  which  is  thrown  every  scrap 
of  vegetable,  fish,  flesh  and  fowl  that  contains  a 
trace  of  nutriment,  the  fire  rate  is  our  pot  on  the 
fire,  into  which  necessity  compels  us  to  dump  every 
scrap  of  cause  that  contains  the  remotest  trace  of 
a  possible  effect  on  the  hazard.  Each  of  the  num- 
berless substances,  natural  and  artificial,  which 
supply  man's  needs,  has  its  distinct  measure  of 
hazard,  either  in  its  fire-generating  or  fire-resisting 
qualities ;  its  liability  to  damage,  or  its  readiness 
to  enter  into  dangerous  chemical  conspiracies  with 
other  substances.  The  industrial  manipulation  or 
manufacture  of  these  substances  creates  innumera- 
ble mixtures  of  hazard  which  are  kept  in  a  state  of 
unstable  equilibrium  by  invention  and  discovery. 
Every  building  has  its  individual  character  in  con- 
structional features,  and  every  building,  as  well  as 
every  substance  it  contains,  may  be  said  to  radiate 
upon  everything  in  its  vicinity  a  share  of  its  own 
hazard,  so  that  every  structure  and  thing  is  aD  in- 
cendiary suspect  in  its  relations  to  every  other 
structure  and  thing.  Municipalities,  as  well  as 
private  enterprise,  supply   fire-preventive  devices 


563 

which  are  not  of  equal  efficiency  in  any  two  risks 
or  communities.  Heat,  cold,  drouth,  winds,  com- 
mercial conditions,  competition,  court  decisions, 
legal  enactments,  departmental  rulings,  politics, 
and  that  all-pervading  attribute  of  human  nature, 
popularly  known  as  "general  cussedness,"  all  go 
into  the  simmering  pot  aufeu,  from  which  is  ladled 
the  mysterious  mishmash,  known  as  the  ''fire 
rate,''  which  serves  to  keep  the  fire  fiend  from  the 
door  of  the  people  and  to  feed  the  family  of  fire 
insurance,  and  above  this  bubbling  caldron  of 
cause  and  effect  broods  a  malodorous  reek  known 
as  moral  hazard,  with  outlines  felt  rather  than  seen, 
which  defies  analysis. 

People  naturally  ask — how  can  all  these  lawless 
elements  of  hazard  be  sifted,  sorted,  arranged  and 
valued  ?  Is  it  not  all  a  game  of  chance,  a  mere 
bean-bag  guessing  match,  in  which  we  may  venture 
to  participate  as  well  as  the  next  man  ? 

Before  attempting  an  answer,  let  us  pause  to  con- 
sider the  interests  of  the  stockholder,  for  he  is  the 
real  party  of  the  first  part — officers,  managers,  field 
men  and  local  agents  are  simply  his  hired  men. 
There  is  not  a  fire  insurance  stockholder  in  the 
United  States  who  could  not  safely  invest  the 
money  equivalent  of  his  stock  and  surplus  where  it 
would  earn  from  4%  to  6%  per  annum.  In  leaving 
his  money  in  pledge  for  the  security  of  the  public 


554 

against  fires,  ordinary  and  extraordinary,  a  pledge 
that  may  be  entirely  forfeited  in  a  single  conflagra- 
tion, it  is  but  natural  to  infer  that  there  should  be 
some  inducement  for  the  risk  incurred. 

The  net  earnings  of  the  stockholder  for  assuming 
this  risk  appear  in  your  annual  reports  under  the 
head  of  profits  on  underwriting,  and  have  averaged 
during  the  past  seven  years  2.16^.  This  may  be 
called  a  pretty  close  shave.  In  fact,  I  question 
whether  one  could  find  another  commodity  sold  to 
the  public  at  so  near  prime  cost  as  fire  indemnity, 
and  it  is  safe  to  say  that  a  business  that,  year  after 
year,  skims  so  close  to  the  margin  between  profit 
and  loss,  is  not  a  game  of  chance  but  a  business 
of  grand  averages.  It  should  be  borne  in  mind 
that  we  are  dealing  with  aggregates — with  fire  in- 
surance as  a  whole.  If  we  take  the  companies 
singly  a  considerable  divergence  will  be  found  in 
their  individual  experience,  for  even  the  slender 
margin  of  two  and  sixteen  hundredths  per  cent, 
embodies  startling  potentialities  for  success  or  dis- 
aster as  determined  by  relative  experience,  enter- 
prise and  good  judgment. 

The  underwriting  profit  and  loss  account  of  the 
individual  companies  for  the  past  ten  years  ending 
January  Ist,  1898,  is  shown  by  the  following  state- 
ment which  embraces  the  experience  of  every 
American  company  with  assets  in  excess  of  $1,000,- 


655 


7% 


000  and  of  all  foreign  companies  that  have  trans- 
acted business  for  the  entire  period  : 

4  companies  from   9%   to  lOfo  profit. 
2  ''  ''       8% 

1         "         "     efc 

4 
5 
5 
6 
9 
7 
3 
5 

1  "  "         Sfo 

4 
2 
1 

It  will  be  noted  that  of  the  entire  sixty  com- 
panies, more  than  one-half  come  within  the  range 
between  Sfo  profit  and  3%  loss. 

The  above  figures,  however,  are  the  record  of  the 
living  and  not  of  the  dead.  During  the  same  ten-year 
period,  considerably  over  three  hundred  stock  com- 
panies, not  to  mention  Mutuals  and  Lloyds,  have 
passed  out  of  existence. 

These  figures  show  that  so  far  as  underwriting 


'^7o 

1^ 

u 

¥ 

loss. 

2fc 

Sfo 

4fo 

5% 

(Kcf, 

556 

profit  is  concerned,  fire  insurance  has  been  fur- 
nished to  the  public  at  as  near  bed  rock  cost  as  any- 
other  commodity.  It  may  be  added  that,  notwith- 
standing the  complicated  procedure  of  establishing 
fire  rates  as  compared  with  the  simple  process  of 
ascertaining  taxable  values,  fire  insurance  as  a  tax 
has  been  assessed  with  as  much  equity  as  any  other 
form  of  taxation.  If  we  stop  to  consider  State  areas 
and  classes  of  risks,  we  find  a  limited  range  of 
divergence  in  loss  ratio,  as  with  single  companies. 
Possibly  rates  might  be  lowered  10^  in  Colorado, 
Illinois,  Iowa,  Nebraska  and  South  Dakota,  but  if 
this  were  done,  self -protection  would  require  a  cor- 
responding advance  in  Kentucky,  Missouri,  Tennes- 
see and  some  other  States.  We  might  lower  rates 
say  15^  in  Wyoming  and  20^  in  Oklahoma  Ter., 
but  it  would  be  necessary  to  advance  them  33^j^  in 
North  Dakota  and  Indian  Ter.  To  do  this  it  would 
be  necessary  to  re-rate  every  risk  in  these  States 
and  about  the  time  the  work  was  done,  a  few  good- 
sized  fires  would  come  along  and  make  pie  of  our 
new  rates.  Since  I  began  writing  this  paper  a  fire 
at  Bismarck  has  doubled  the  loss  ratio  of  North 
Dakota  and  it  is  not  an  uncommon  occurrence  for  a 
single  fire  to  increase  the  loss  ratio  of  a  State  from 
ten  to  fifty  per  cent. 

A  proper  adjustment  of  rates  among  classes  is  the 
real  nub  of  the  rate  problem  ;  for  the  difference  be- 


557 

tween  classes  is  actual,  while  the  difference  between 
States  with  similar  climatic  and  social  conditions  is 
largely  imaginary.  There  is  no  aflGlnity  or  corre- 
spondence whatever  between  a  saw  mill  and  a 
church,  or  a  tannery  and  a  theatre,  or  a  livery  stable 
and  a  jewelry  store.  Classes  are  physically  distinct 
and  independent,  and  each  class  must  be  studied, 
analyzed,  grouped,  and  its  experience  over  wide 
areas  and  for  long  periods  codified  before  its  rates 
can  be  intelligently  determined.  It  is  not  generally 
known  that  many  important  classes  have  for  years 
been  carried  by  the  fire  companies  at  a  loss.  It  is 
difficult  to  obtain  the  exact  experience  of  individ- 
ual companies  by  classes,  for  this  information  is 
jealously  guarded  by  each  company,  but  there  is 
hardly  room  to  doubt  that  at  least  one  class  in  three 
is  insured  at  a  loss  to  the  companies.  Every  dollar  in 
premiums  received  on  these  classes  has  cost  the 
companies  from  one  dollar  to  a  dollar  and  fifty 
cents,  and  in  point  of  unprofitableness,  farm  prop- 
erty is  easily  first.  It  is  one  of  the  many  paradoxes 
of  our  business  that  the  farmers,  who  have  been  the 
unrelenting  foes  of  fire  insurance,  and  who  have 
voted  solidly  for  all  legislation  inimical  to  its  inter- 
ests, have  for  many  years  received  about  one  dol- 
lar and  fifty  cents  for  each  dollar  they  have  paid 
for  fire  indemnity.  Despite  the  fact  that  in  many 
Western  States  farm  rates  are  now  nearly  double 


558 

what  they  were  fifteen  years  ago,  very  few  leading 
general  agency  companies  are  at  the  present  time 
willing  to  insure  farm  property  at  any  rate,  and  with 
the  present  cost  ratio  of  $1.50,  it  is  safe  to  say  that 
rates  must  continue  to  advance.  Farm  property, 
as  a  class,  has  always  been  free  from  the  control  of 
boards,  compacts  and  rating  organizations  of  every 
ki?id,  and  in  the  light  of  experience  it  is  hard  to 
resist  the  conclusion  that  when  the  farmers  learn 
what  is  the  matter  they  will  realize  that  they  are 
suffering  for  the  beneficent  protection  of  that  ima- 
ginary monster  known  as  "  the  great  fire  insurance 
octopus." 

As  to  classes,  however,  as  well  as  companies  and 
States,  it  is  proper  to  say  that,  with  the  exception 
of  perhaps  farm  business,  the  range  of  deviation 
between  the  extremes  of  profit  and  loss  narrows  in 
direct  proportion  to  the  volume  of  premiums.  The 
greater  the  State,  the  larger  the  company,  or  the 
more  important  the  class,  the  nearer,  as  a  rule,  its 
experience  approximates  the  dividing  line  between 
profit  and  loss.  The  widest  range,  as  a  rule,  is 
found  with  minor  companies,  minor  States  and 
minor  classes  whose  volume  of  premiums  is  so 
small  that  the  loss  ratio  is  materially  changed  by 
ordinary  conflagrations.  It  would  perhaps  be  safe 
to  state  broadly  that  the  experience  of  every  im- 
portant company,  state  or  class,  comes  within  ten 


559 

per  cent,  of  tlie  mean  line  established  by  the  aver- 
age underwriting  profit  of  all  companies,  and  in 
this  fact  there  is  more  room  for  astonishment  than 
complaint.  If  you  ask  how  this  has  been  accom- 
plished, I  can  only  surmise  that  it  has  come  through 
the  indirect,  perhaps  unconscious  application  of 
that  species  of  universal  solvent  known  as  classifi- 
cation. 

Every  leading  company  maintains  a  tabulation 
of  its  experience,  in  which  every  risk  is  classified 
and  each  class  charged  with  its  losses  and  credited 
with  its  income.  Some  of  these  tabulations  extend 
back  for  half  a  century  and  contain  information  of 
inestimable  value  to  the  individual  companies. 
The  schedules,  from  which  local  tariffs  are  made, 
are  the  result  of  conference  and  are  based  upon 
these  tabulations.  These  conferences  bear  fruit  in 
basis  rates,  which  indicate  in  a  general  way  the  re- 
sult of  combined  experience,  modified  by  mutual 
concessions  within  the  range  of  individual  experi- 
ence. 

I  need  not  explain  how  an  elaborate  and  compli- 
cated system  of  basis  rates,  with  established 
charges  and  credits  for  the  thousand  and  one 
things  which  constitute  the  fire  hazard,  has  grown 
up  from  united  experience  and  consultation,  nor 
how,  from  these  basis  rates,  have  been  evolved 
thousands  of  local  tariffs,  nor  how  the  incessant 


560 

changes  in  hazard  necessitate  constant  reinspection 
and  revision,  eternal  vigilance,  ceaseless  work  and 
endless  expense.  With  all  this  colossal  work, 
there  has  been  no  time  when  a  majority  of  com- 
panies have  not  refused  to  share  in  the  labor  and 
expense.  These  companies  have  used  the  tariffs 
without  acknowledgment,  obligation  or  expense 
as  a  source  of  information  to  determine  what  con- 
cession in  rate  or  commission  might  be  necessary 
to  secure  the  most  desirable  business,  and  some  of 
these  companies  have  spared  no  effort  to  foment 
public  prejudice  against  the  companies  whose 
labors  they  have  appropriated.  The  prevalent  im- 
pression that  fire  rates  are  established  by  a  great 
and  remorseless  trust,  is  largely  due  to  these  com- 
panies, whose  very  existence  proves  the  falsity  of 
the  charge. 

For  many  years  there  has  been  a  growing  belief 
in  the  necessity  for  uniform  classifications  and  sys- 
tematic compilations  of  the  combined  experience  of 
the  companies  as  the  basis  from  which  to  determine 
with  greater  exactness  the  relative  cost  among 
classes.  Repeated  attempts  have  been  made  to  in- 
duce the  companies  to  furnish  their  tabulated  ex- 
perience for  the  common  good.  It  would  seem  at 
first  thought  that  only  a  narrow  and  selfish  policy 
could  prevent  a  company  from  co-operating  in  a 
work  so  essential  to  the  common  weal ;  but  when 


661 

we  consider  that  these  company  statistics  embody 
trade  secrets  which  have  dominated  the  policy  of 
each  company  and  contributed  to  its  prosperity,  it 
may  well  be  imagined  that  there  would  be  strong 
grounds  for  hesitation  before  delivering  this  in- 
formation into  the  hands  of  business  rivals.  The 
necessity  for  a  wider  horizon  in  fire  underwriting  is 
the  only  personal  inducement  there  could  be  for  a 
company  to  reveal  its  trade  secrets  to  its  less  pros- 
perous rivals,  though  from  the  broader  standpoint 
of  the  common  welfare,  enlightened  underwriters 
generally  admit  the  desirability  of  more  exact 
methods  in  their  dealings  with  classes.  In  this 
connection  there  is  a  collateral  feature  of  classifi- 
cation interesting  in  its  relations,  not  only  to  the 
rate  problem  but  to  the  question  of  fire  reserves 
which  has  perplexed  you  in  your  official  capacity 
for  so  many  years. 

It  is  a  well-known  fact  that  fire  rates  are  never 
at  rest.  Constant  fiuctuation  is  perhaps  a  perma- 
nent necessity — it  is  at  least  unavoidable  under 
present  rating  methods.  A  comparison  of  losses 
with  premiums  derived  from  fluctuating  rates  is  a 
comparison  of  a  fixed  quantity  with  a  varying 
quantity.  Were  it  possible  to  compare  annual 
class  losses  with  the  average  cost  to  companies  dur- 
ing long  periods,  the  comparison  would  exhibit 
true  ratios  and  establish  the  relative  cost  of  each 


562 

class  as  a  basis  from  whicli  to  formulate  State  and 
local  schedules  of  cost,  instead  of  tariffs  of  rates, 
as  in  the  past. 

The  practical  application  of  combined  classifica- 
tion seems  to  make  this  mode  of  procedure  a  neces- 
sity and  in  this  necessity  lies,  as  I  believe,  the 
solution  of  not  only  some  knotty  points  in  the  rate 
problem,  but  of  the  question  of  reinsurance  re- 
serves. On  the  companies'  side,  it  clears  away  the 
perplexities  which  have  arisen  from  the  inertia  of 
existing  rates.  Few  people  appreciate  the  delays 
and  enormous  difficulties  involved  in  the  system- 
atic re-rating  of  every  risk  throughout  an  extended 
territory — say  a  State.  Local  tariffs  will  not  ad- 
mit of  percentage  class  modifications  and  this 
defect  is  the  source  of  constant  trouble  and  mis- 
understanding between  the  companies  and  the 
public. 

A  State,  for  example,  has  had  a  protracted 
period  of  immunity  from  fires  while  another  State 
has  had  exceptionally  heavy  losses.  Rates  cannot 
be  altered  without  great  delay  and  the  expense  of 
an  itemized  re-rating  of  every  risk  in  both  States. 
Meanwhile,  matters  drift  along,  the  one  State  help- 
ing to  pay  for  the  losses  of  the  other.  The  same 
difficulty  occurs  with  classes.  One  class  develops 
and  maintains  a  material  increase  in  hazard ; 
another  class  the  reverse.     There  is  no  way  to  meet 


563 

the  change  except  to  re-rate  every  risk  of  both 
classes,  not  only  in  one  State  but  throughout  the 
entire  country,  which,  like  the  task  of  bringing  up 
the  heavy  artillery  over  muddy  roads,  is  a  slow  and 
expensive  job.  The  companies  are  unjustly  charged 
with  an  indisposition  to  lower  rates  under  any  cir- 
cumstances, because  they  cannot  accomplish  the 
impossible.  Demoralization  and  rate  cutting  ensue 
and  legitimate  insurance  suffers  the  loss  of  good 
business  and  good  will.  No  one  appreciates  this 
doughlike  absence  of  resiliency  in  our  present 
tariffs  better  than  the  companies  themselves.  If 
the  result  of  classilication  is  to  create  tables  of  cost 
instead  of  rate  tariffs,  rates  will  establish  them- 
selves just  as  selling  prices  are  established  in  the 
dry  goods  and  hardware  trade.  The  rates  of  each 
State  will  become  an  exact  reflection  of  its  loss 
ratio  and  necessary  changes  in  rates  may  occur 
without  disturbing  the  reliability  of  tabulated  ex- 
perience. The  public  would  ultimately  learn  that 
the  spirit  of  mutuality  pervaded  the  system ;  that 
an  increase  in  losses  meant  higher  rates,  and  that 
the  responsibility  was  with  them  and  not  with  the 
companies.  People  would  soon  come  to  regard  a 
rate-cutting  company  with  the  same  feeling  of  dis- 
trust they  feel  for  a  bank  that  offers  too  much  in- 
terest for  deposits.  An  unchanging  basis  of  fire 
cost  with  reasonable  percentage  additions  for  trade 


664 

profit  seems  to  be  the  unavoidable  outcome  of  ap- 
plied classification.  A  rating  system  established 
upon  this  basis  would  place  fire  insurance  in  line 
with  other  mercantile  pursuits.  It  would,  in  a 
measure,  give  to  the  business  the  stability  of  bank- 
ing. It  would  offer  a  degree  of  safety  to  capital 
justifying  moderate  profits.  Close  underwriting 
discrimination,  and  economy  of  management  would 
largely  supplant  the  element  of  luck.  Last  but  not 
least  it  would  establish  a  basis — in  fact  the  only 
accurate  basis  from  which  to  determine  the  proper 
reserve  for  each  company.  A  change  of  this  magni- 
tude and  importance  is  not  to  be  accomplished  in  a 
day  ;  it  must  come  as  the  result  of  ceaseless  agita- 
tion and  labor  on  the  part  of  those  who  mould  in- 
surance thought. 

I  have  attempted  to  describe  this  gromng  senti- 
ment to  you  as  being  in  my  judgment  one  of  the 
most  significant  indications  in  the  evolution  of  fire 
insurance.  In  your  official  capacity  you  have  it  in 
your  power  to  lend  efficient  aid  and  the  best  aid  you 
can  give  will  be  to  use  your  influence  to  induce  the 
legislatures  to  keep  their  hands  off  and  let  Dame 
Nature  have  her  way  as  she  is  sure  to  do  in  the  end. 
This  brings  me  at  last  to  the  relation  of  the  States 
to  the  rate  question. 

In  eight  Western  States  the  fire  companies  are 
forbidden  by  law  to  confer  together  on  the  subject 


565 

of  rates.  In  some  of  these  States  the  State  com- 
panies are  excepted,  in  others  local  agents  are  per- 
mitted to  make  our  rates.  In  every  business  of 
barter  and  sale  it  is  considered  necessary  before 
marking  the  selling  price  on  a  piece  of  goods  to  ex- 
amine the  bill  of  purchase  and  find  its  cost.  This 
sensible  procedure  seems  to  be  as  innocuous  and 
necessary  with  us  as  with  the  grocer  and  dry 
goods  man,  but  unfortunately  our  bills  of  purchase 
are  complicated  and  tangled  up  with  the  purchase 
invoices  of  our  neighbors  and  we  cannot  find  the 
cost  of  the  risks  we  sell  with  the  ease  and  certainty 
with  which  a  grocer  finds  the  cost  of  a  ham  or  cod- 
fish. 

I  have  tried  to  show  the  devious  and  complicated 
processes  through  which  we  establish  the  relative 
cost  of  our  wares  and  I  trust  I  have  been  able  to 
demonstrate  that  no  single  company  has  or  can  pos- 
sibly obtain  the  information  necessary  to  determine 
the  cost  of  the  goods  it  sells.  Conference  is  an  abso- 
lute necessity  and  the  more  people  who  join  in  the 
conference  the  nearer  they  can  get  to  the  exact  truth. 

A  dmitting  that  we  are  expected  to  sell  our  goods 
without  profit,  that  capital  is  beneficent  enough  to 
supply  this  country  with  fire  indemnity  at  cost, 
your  official  figures  show  that  we  have  come  within 
2.16^  of  the  truth  ;  but  this  is  the  truth  as  to  the 
whole  and  only  an  approximation  as  to  its  parts. 


566 

There  is  room  for  a  closer  approximation  as  to 
classes  and  when  class  rates  have  been  equalized, 
State  rates  will  adjust  themselves  as  a  necessary  se- 
quence. In  this,  the  companies  and  the  public 
have  a  perfect  community  of  interest  and  all  are 
seeking  the  same  end  though  in  vastly  different 
and  conflicting  ways.  .N'o  fair-minded  citizen  de- 
sires that  the  school-house  class  shall  be  mulcted  to 
pay  the  premiums  of  planing  mills  or  ice  houses,  or 
that  dwellings  or  churches  shall  contribute  to  pay 
the  premiums  of  wholesale  lumber  yards,  tanneries 
or  distilleries.  The  companies  are  as  anxious  to 
stop  this  sort  of  injustice  as  the  people.  But  to 
remedy  this,  companies  must  have  the  constitu- 
tional right  conferred  on  every  citizen  of  free 
mutual  conference.  Without  this  right,  individual 
companies,  one  and  all,  are  helpless.  Even  were  it 
possible  for  a  single  company  to  ascertain  from  its 
own  limited  experience  the  proper  cost  of  its  wares, 
this  cost  would  not  be  the  cost  of  the  specific  risk 
but  the  cost  of  the  class  to  which  it  belongs.  To 
find  the  cost  of  the  specific  risk,  it  would  be  neces- 
sary for  each  company  to  send  a  rating  expert  from 
one  hundred  to  a  thousand  miles  to  make  a  per- 
sonal examination  of  its  character  and  environ- 
ments. Let  us  say  that  a  company  writes  100,000 
risks  per  annum — an  average  of  300  risks  per  day. 
If  it  were  a  physical  possibility  to  send  a  compe- 


567 

tent  man  to  examine  each  of  these  risks  and  estab- 
lish its  rate,  the  travelling  expenses  would  eat  up 
the  company's  capital  in  six  months.  A  hundred 
other  companies  would  have  to  repeat  precisely  the 
same  work  one  hundred  times  over  and,  incredible 
as  it  may  seem,  legislators  expect  that  this  sort  of 
thing  will  cheapen  rates.  The  fact  is  that  the 
making  of  fire  rates  is  a  colossal  work— a  work  that 
transcends  the  capacity  of  individual  enterprise. 
Like  fire  departments,  water  works,  public  school 
systems  and  Panama  Canals,  it  is  an  undertaking 
that  can  only  be  accomplished  by  united  effort. 
If  the  public  won't  let  the  companies  co-operate  in 
making  rates  the  public  must  eventually  take 
charge  of  the  work  itself,  and  from  a  long  and  in- 
timate knowledge  of  the  subject  I  can  most  de- 
voutly say  :  God  help  the  public  functionary  who 
has  to  apportion  rates  among  breweries,  theatres, 
churches,  schools,  dance  halls,  distilleries  and  other 
natural  enemies  in  our  social  fabric. 

It  is  not  to  be  presumed  that  legislators  in  enact- 
ing anti-compact  laws  have  been  animated  by  any 
other  than  a  desire  for  the  public  welfare,  and  it  is 
an  interesting  question  as  to  what  is  the  real  public 
welfare  in  the  matter  of  fire  rates.  Ostensibly, 
anti-compact  laws  are  intended  to  encourage  open 
competition  and  from  a  cursory  view  this  would 
seem  to  be  for  the  public  interest,  but  to  encourage 


568 

competition  at  inadequate  rates  is  to  crush  out  com- 
petition in  the  end  and  defeat  the  intention  of  the 
anti  compact  laws. 

The  alacrity  with  which  the  tidal  wave  of  capital 
responds  to  the  inconstant  moon  of  loss  ratio  is  a 
notable  phenomenon  in  the  world  of  fire  insurance. 
The  fierce  light  of  publicity  which  beats  about  the 
affairs  of  fire  insurance  allows  no  concealment.  Our 
concerns,  to  the  smallest  detail,  are  promptly  pub- 
lished to  the  world.  There  is  no  possibility  of  hid- 
jLii><  abnormal  profits  from  the  prying  eye  of  compe- 
tition. On  the  other  hand,  there  is  no  enterprise 
cnat  capital  can  so  easily  abandon  as  fire  insurance. 
T.tie  laws  require  our  assets  to  be  sound  and  conver- 
tible. The  process,  of  either  liquidating  or  looting 
a  tire  company,  is  short  and  easy,  and  capital  in  its 
cold-blooded  way  reasons  that  the  dollar  which 
fights  and  runs  away  may  live  to  figfit  another  day. 

The  past  five  years  have  furnished  an  interesting 
Ulustration  of  this  tidal  law.  The  heavy  losses  of 
♦  892-3-4  were  followed  by  the  retirement  of  about 
rwo  hundred  competing  organizations — stock,  mu- 
tual and  lloyds.  The  low  loss  ratio  and  high  rates 
■•  )i  1896-7  caused  a  reflect  wave  of  competition  which 
washed  onto  our  shores  a  large  number  of  foreign 
organizations  and  the  past  year  has  been  remarka- 
bly prolific  in  hatching  out  new  American  com- 
panies of  foreign  parentage,  though  it  is  but  fair  to 


569 

say  that  most  of  the  new  organizations  are  connec- 
ted with,  and  nourished  from  the  management  ex- 
penses of  their  parent  organizations,  being  either 
corporate  fictions  or  the  result  of  new  competitive 
methods  rather  than  independent  organizations 
created  to  compete  for  business  on  their  own  merits 
and  responsibility.  Perhaps  it  would  not  be  nec- 
essary to  mention  this  but  for  the  fact  that  it  shows 
that  the  ebb  tide  is  stronger  than  the  flood  tide  ; 
that  the  transaction  of  our  business  has  been  made 
so  uncomfortable,  if  not  dangerous,  by  the  exacting 
laws  of  forty  odd  States  that  home  capital  at  least, 
flows  out  more  freely  than  it  flows  in,  and  that  re- 
cent accretions  of  capital  do  not  increase  the  num- 
ber of  competing  organizations,  because  they  are 
concentrated  under  the  management  of  established 
companies.  Be  this  as  it  may,  the  phenomenon  of 
inflow  and  outflow  of  capital  in  response  to  fluctua- 
tions in  the  loss  ratio  is  unmistakable  and  the  ques- 
tion is — What  have  the  States  to  gain  by  forbidding 
fire  insurance  to  establish  rates  upon  its  average  ex- 
perience when  these  rates  are  automatically  regu- 
lated by  the  natural  law  of  supply  and  demand  ? 
True,  they  are  regulated  by  great  tidal  rate  waves 
that  swamp  most  of  the  small  craft,  and  from  a 
common  sense  standpoint  it  would  seem  that  public 
interests  might  be  better  conserved  by  steady  equa- 
ble rates  derived  from  continental  averages. 


570 

It  lias  been  a  full  generation  since  Ave  have  had  a 
national  rate  war,  and  the  probabilities  of  another 
are  about  as  uncertain  as  the  possibilities  of  a  gen- 
eral European  war.  The  great  underwriting  insti- 
tutions have  too  profound  a  respect  for  each  other' s 
financial  armaments,  and  too  much  regard  for  their 
own  Men-etre  to  relish  a  general  contest  that  would 
bring  ruin  to  all.  The  rate  wars  which  claim  con- 
sideration are  those  confined  to  individual  risks  or 
to  local  or  State  areas.  Local  rate  wars  are  peren- 
nial. There  is  no  time  when  they  are  not  raging 
in  a  score  of  places  throughout  the  country.  They 
are,  as  a  rule,  the  result  of  unfair  practices  or  per- 
sonal antagonism  on  the  part  of  local  agents,  which 
can  only  be  allayed  by  allowing  them  to  fight  out 
their  differences  to  a  finish.  Occasionally  a  rate 
war  breaks  out  over  a  considerable  area,  as  in  the 
recent  protracted  contest  on  the  Pacific  Coast.  Let 
us  inquire  whether  it  is  pro  bono  pioblico  to  en- 
courage this  sort  of  thing. 

I  leave  it  to  you  who  represent  States  east  of  the 
Kocky  Mountains,  to  judge  of  the  material  benefits 
your  constituents  received  from  the  fact  that  the 
bag  which  holds  the  fire  indemnity  of  the  American 
people  came  untied  and  showered  out,  say  a  million 
dollars,  upon  the  people  of  the  Pacific  Coast.  It  is 
true,  this  shower  seemed  to  be  a  godsend  to  the  peo- 
ple of  the  Pacific  Coast  who  happened  to  be  at  the 


571 

right  end  of  the  cornucopia,  but  was  it  an  unmixed 
blessing  ?  It  is  to  be  feared  not.  Few  realize  how 
fire  insurance,  by  its  inspections  and  safeguards, 
protects  people  from  each  other.  A  rate  war  abol- 
ishes all  requirements  and  puts  a  stop  to  improve- 
ments which  are  no  longer  recognized  in  the  rate. 
Everything  goes — gasoline,  explosives,  defective 
flues,  rubbish  and  dangerous  heating  and  lighting 
arrangements.  Every  man  has  carte  blanche  to 
endanger  his  own  and  his  neighbor's  property.  A 
wide  open  policy  supplants  sound  underwriting 
practices,  difficult  to  re-establish.  It  wall  be  many 
years  before  the  normal  loss  ratio  of  the  people  of 
the  Pacific  Coast  will  be  restored,  and  in  the  end 
they  will  probably  come  out  at  the  wrong  end  of 
the  horn  of  plenty,  which  has  been  treating  them 
so  prodigally  of  late. 

Last  summer  a  short,  sharp  and  decisive  engage- 
ment occurred  in  the  capital  of  this  State  ;  within 
twenty-four  hours  nearly  every  outstanding  policy 
was  taken  up,  the  premiums  refunded  and  new 
policies  issued  for  three  to  five  years  for  a  nominal 
consideration.  The  good  people  of  Madison,  Wis., 
are  still  hugging  themselves  because  for  some  years 
to  come  they  will  enjoy  the  benefits  of  free  insur- 
ance ;  but  are  the  people  of  Milwaukee,  Oshkosh 
and  other  towns  of  this  State  hugging  themselves  ? 
Was  there  any  result  from  this  insane  fight  that 


572 

should  cause  the  commonwealth  of  Wisconsin  to 
felicitate  itself  ? 

At  the  present  time  lire  insurance,  like  salvation, 
is  free  to  the  Astors,  Yanderbilts,  Goulds  and  other 
rich  but  more  or  less  honest  people  of  Gotham. 
Their  twenty-nine-story  sky  scrapers  are  being  in- 
sured for  five  years  at  less  than  one  cent  on  the  one 
hundred  dollars  per  annum.  A  thousand  dollar 
fire  policy  is  costing  much  less  this  summer  in 
Manhattan  than  a  Manhattan  cocktail.  Are  the 
sixty  odd  million  people  outside  of  New  York  City 
benefited  by  this  incredible  discrimination?  Is 
society  benefited  when  a  tramp  steals  a  ride  in  an 
empty  freight  car,  or  a  tax  dodger  escapes  the 
assessor?  The  law  frowns  upon  railroad  dead- 
heads ;  why  should  it  smile  upon  insurance  dead- 
heads ? 

What  may  be  said  of  fire  insurance  rate  wars, 
may  be  said  with  equal  truth  of  the  rate  cutting  of 
individual  risks,  or  of  any  other  deviation  from 
tariffs  established  with  the  fundamental  idea  of 
impartiality.  All  these  things  discriminate  in  favor 
of  one  person  or  one  community  at  the  expense  of 
other  persons  or  other  communities.  They  are  not 
democratic.  They  are  unjust.  Fire  insurance  is 
a  tax  and  the  law  should  not  encourage  its  tax 
dodgers.  The  State,  if  it  has  any  duty  in  the  mat- 
ter, owes  this  duty  to  the  public  at  large  and  not  to 


573 

a  few  favored  individuals  or  communities.  If  the 
State  has  any  concern  in  fire  rates,  it  is  to  see  that 
they  are  fairly  distributed  as  to  States,  municipal- 
ities, individual  risks  and  classes  of  risks. 

In  considering  the  question  of  an  equable  distri- 
bution among  States,  the  first  question  that  arises 
is,  whether  each  State  should  stand  upon  its  own 
bottom  or  share  with  other  States  in  the  average 
loss  ratio  derived  from  long  periods  of  time  over 
the  entire  country.  A  study  of  the  annual  loss 
ratio  of  the  individual  States  shows  in  many  States 
enormous  fluctuations.  For  instance,  Illinois  and 
Massachusetts  for  many  years  have  shown  low  loss 
ratios  with  small  rate  fluctuations.  If  these  States 
had  been  assessed  upon  their  loss  ratios  at  the  time 
of  the  Chicago  and  Boston  fires,  it  would  have  been 
practical  confiscation  for  the  people  of  Illinois  and 
Massachusetts.  In  the  Indian  Territory  the  loss 
ratio  was  raised  from  '65%  to  224^  by  the  Ardmore 
fire ;  in  North  Dakota  from  44^  to  319^  by  the 
Fargo  fire.  In  1892-93  the  city  of  Milwaukee  was 
visited  by  a  series  of  disastrous  fires  culminating  in 
a  sweeping  conflagration  which  nearly  quadrupled 
the  loss  ratio  of  this  State.  A  similar  experience 
occurred  at  the  time  of  the  great  Oshkosh  confla- 
gration. An  advance  in  rates  to  correspond  with 
these  increases  in  State  loss  ratios  would  have  been 
^  public  calamity. 


574 

The  entire  annual  premiums  of  some  States  are 
not  equal  to  those  of  many  leading  cities  and  yet 
no  one  would  claim  that  each  city  should  be  com- 
pelled to  stand  upon  its  own  bottom.  A  city  con- 
flagration is  a  matter  of  national  concern  and  the 
great  fundamental  object  of  fire  insurance,  which  is 
to  disperse  the  effects  of  the  shock  of  every  confla- 
gration, great  or  small,  over  the  widest  possible  area 
of  space  and  time,  is  violated  when  we  confine  this 
shock  to  city  or  State  areas  and  short  periods  of 
time.  Stability  in  the  price  of  fire  indemnity  is  as 
much  a  necessity  as  stability  in  the  price  of  any 
other  commodity  and  there  is  even  greater  reason 
for  comity  among  States  in  the  distribution  of  the 
fire  loss  than  there  is  for  comity  in  other  relations. 
On  the  other  hand,  the  normal  loss  ratios  of  indi- 
vidual States  for  long  periods  compared  with  each 
other  vary  widely  and  their  rates  must  be  fixed  to 
correspond.  We  cannot  expect  the  rates  of  Texas 
or  North  Dakota,  for  instance,  to  be  as  low  as  the 
rates  of  Ohio  or  Rhode  Island.  The  true  relation 
of  the  loss  ratio  of  these  States  in  comparison  with 
the  national  loss  ratio  can  only  be  determined  by 
comparison  during  long  stretches  of  time.  No 
State  can  justly  ask  for  rates  based  exclusively 
upon  its  individual  experience  without  the  recipro- 
cal obligation  to  submit  to  a  corresponding  advance 
in  case  of  the  destruction  of  one  of  its  great  proj)- 


575 

erty  centres  and  it  is  pertinent  to  inquire  whether 
any  State  can  afford  to  mortgage  its  future  for  the 
small  amount  it  could  possibly  save  in  premiums. 

The  question  of  equity  in  rates  as  to  classes  is  no 
less  important  tlian  equity  as  to  State  areas.  How- 
can  equable  class  rates  be  maintained  upon  the 
narrow  statistical  basis  of  a  single  State  ?  For  in- 
stance, about  all  the  large  breweries  in  Wisconsin 
are  centred  in  this  city.  Let  us  suppose  the  Pabst 
brewery  should  generate  a  million  dollar  conflagra- 
tion. Messrs.  Blatz  and  Schlitz  and  Miller  and  Jung 
would  feel  it  a  hardship  to  have  the  entire  loss  as- 
sessed on  their  next  year's  rate.  The  owners  of 
dwellings,  stores,  flouring  mills,  etc.,  would  feel  that 
they  had  no  personal  interest  in  the  brewing  in- 
dustry ;  the  churches  would  roll  up  their  eyes  in 
pious  horror  at  the  mere  thought  of  being  assessed 
to  re-build  a  brewery,  and  there  would  probably  be 
a  tempest  in  a  tea  pot  over  the  question  of  appor- 
tionment of  brewery  rates. 

Similar  complications  would  result  in  the  event  of 
the  destruction  by  fire  of  the  Pfister  &  Yogel  Tan- 
nery, the  Angus-Smith  Elevators,  or  the  E.  P.  Allis 
&  Company  establishment  of  this  city,  the  Singer 
Sewing  Machine,  Studebaker  Wagon  Works,  or  De 
Pauw  Plate  Glass  Works  of  Indiana,  the  Illinois 
Steel  Company,  Anglo-Swiss  Condensed  Milk  Com- 
pany,  the  great  glucose  works  or  distilleries  of 


576 

Peoria,  Illinois,  or  any  one  of  the  thousands  of 
other  great  industrial  establishments  scattered 
throughout  the  length  and  breadth  of  the  land. 

Down  in  the  "  Kaw  Bottom  "in  Kansas  City, 
Kansas,  in  a  space  no  larger  than  a  quarter  section 
of  land,  are  clustered  practically  all  of  the  packing 
houses  in  the  State  of  Kansas,  and  mammoth  es- 
tablishments they  are,  embracing  many  millions  in 
values,  all  subject  to  a  single  conflagration.     What 
would  happen    if    the  commonwealth   of    Kansas 
should  try  the  experiment  of  State  insurance  and 
all  these  pork  houses  should  take  it  into  their  heads 
to  burn  together  ?      Would  the  horny-handed  sons 
of  the  soil  ''out  there  near  to  nature's  heart "  and 
the  sixth  principal  meridian,   go  down    in   their 
pockets,  to  make  good  the  loss  of  the  plutocratic 
packers?    Probably  not,  but  admitting  that  they 
would,  how  would  packing  house  rates  be  figured 
the  next  year  on  the  State  experience  ?    If  not  fig- 
ured on  State  experience,  rates  might,  it  is  true  (if 
the  people  of  Kansas  were  willing  to  act  as  bankers 
and  advance  the  deficit),   be  figured    on   United 
States  experience,  but  this  would  simply  be  coming 
back  to  present  methods,  from  which  there  is  no 
alternative  except  to  throw  experience  to  the  dogs. 
All  this  may  seem  like  a  reductio  ad  dbsurdum^ 
but  these  are  contingences  that  may  not  be  avoided 
in  the  attempt  to  equalize  rates  among  classes  from 


577 

the  experience  of  single  States,  and  it  is  to  these 
puerilities  that  the  anti-compact  laws  lead  us. 
State  companies,  as  a  rule,  have  a  much  higher  ex- 
pense ratio  than  companies  transacting  business  in 
all  States,  and  they  certainly  cannot  afford  to 
make  lower  rates  on  that  account.  In  one  Western 
State  where  the  anti-compact  law  has  been  rigidly 
enforced,  there  is  only  one  stock  company,  and  its 
average  expense  ratio  has  been  nearly  50%.  Just 
how  it  could  establish  lower  rates  on  this  expense 
ratio  is  an  interesting  question  in  problematics. 

We  strike  a  still  worse  muddle  in  States  where 
the  rate-making  function  is  taken  away  from  the 
companies  and  imposed  upon  the  local  agents.  As- 
suming that  fair  and  uniform  treatment  to  com- 
munities and  individuals  in  the  distribution  of  the 
fire  tax  is  essential  ;  that  the  public  at  large  can 
gain  nothing  from  the  adoption  of  Bowery  clothing 
store  methods  in  the  sale  of  fire  indemnity,  nothing 
from  our  charging  each  customer  as  much  as  he 
will  pay,  nothing  from  our  taxing  Smith  more  for 
the  same  hazard  than  Jones,  or  Smithville  more 
than  Jonesville,  the  question  is — How  is  this  to  be 
avoided  if  we  are  compelled  to  take  the  cost  mark 
off  our  goods  and  leave  the  selling  price  to  the 
guessing  abilities  and  persuasive  powers  of  our 
salesmen  ? 

The  average  local  agent  is  a  useful  member  of  the 


578    ' 

community,  but  experience  tables  and  statistical 
investigation  are  not  in  his  line,  and  if  they  were 
he  could  not  make  bricks  without  straw.  His  local 
experience  bears  the  same  relation  to  grand  aver- 
ages that  a  geometrical  point  bears  to  space.  Fre- 
quently he  reaches  a  green  old  age  without  the  op- 
portunity of  seeing  a  fire  more  serious  than  a  con- 
flagration in  a  woodshed.  His  ideas  as  to  the  cost 
of  indemnity  or  the  relative  hazard  of  classes  are 
hardly  more  definite,  and  far  less  positive,  than 
those  of  his  customers.  His  dominant  motive  is  to 
make  a  sale  under  the  stress  of  competition.  To 
throw  him  upon  his  own  resources  in  making  rates 
is  to  make  a  junk  heap  of  experience  and  ensure 
different  rates  in  every  town  and  for  every  risk. 

For  his  services  as  a  salesman  the  local  agent  re- 
ceives from  one-fifth  to  one-half  as  much  as  the 
company  which  pays  the  losses  and  expenses,  and 
his  interest  in  maintaining  rates  is  in  direct  pro- 
portion to  his  commissions.  The  agent  who  gets 
thirty  per  cent,  is  hurt  twice  as  much  by  a  rate  re- 
duction as  the  agent  who  gets  fifteen  per  cent.  It 
is  a  well  known  fact  that  every  rate  reduction 
during  recent  years  has  brought  out  numerous  and 
vigorous  protests  from  high-commission  agents.  In 
many  towns  local  boards  have  passed  resolutions 
refusing  to  lower  rates  and  in  many  more  they  have 
threatened  to  do  so. 


579 

The  results  of  local  agents'  ratings  in  Wisconsin 
have  not  been  altogether  lovely.  The  rate-making 
function  is  attended  with  some  unpleasant  respon- 
sibilities. It  is  a  mathematical  rather  than  a  con- 
troversial function,  and  can  be  better  exercised  in 
the  calm  seclusion  of  statistics  than  in  ex  parte 
discussions  between  people  equally  ignorant  of 
fundamental  truths.  Sensible  agents  soon  found 
that  the  necessity  for  heated  and  unprofitable  dis- 
cussions with  their  patrons  could  only  be  avoided 
by  hiring  some  disinterested  expert  to  relieve  them 
of  the  responsibility,  and  most  of  the  rating  in- 
spectors who  had  lost  their  jobs  under  the  law 
soon  found  employment  in  making  rates  for  local 
boards. 

I  have  endeavored  in  a  crude  way  to  call  your 
attention  to  some  of  the  more  important  features 
of  the  rate  question  in  fire  insurance.  In  closing, 
let  me  remind  you  that  fire  indemnity  is  not  a  cor- 
nerable  product.  It  is  not  amenable  to  trust 
methods.  Genuine  fire  indemnity  is  an  emanation 
from  capital  that  fire  brings  back  from  its  vaporous 
condition  into  a  solid  state,  and  this  emanation  can 
never  be  bottled  into  a  trust  until  it  is  possible  to 
bottle  up  the  world's  capital.  Fire  insurance  is 
not  a  syndicate,  but  a  community  as  numerous  as 
our  combined  land  and  naval  forces,  and  a  com- 
munity with  more  than  its  share  of  rivalries  and 


680 

conflicting  interests.  Capital  is  Capital's  worst 
enemy ;  Capital  fears  competition  worse  than  it 
fears  hostile  legislation.  Every  well -managed  com- 
pany dreads  high  rates,  which  increase  reckless 
competition,  more  than  it  dreads  low  rates  which 
develop  economical  and  respectable  methods  and 
crush  out  unskillful  competition.  In  proof  of  this 
let  me  add  that  the  companies  have,  during  the 
past  two  years,  voluntarily  made  large  rate  reduc- 
tions throughout  the  West  on  some  of  the  most 
important  classes — on  tornado  rates  nearly  fifty  per 
cent.  ;  on  retail  lumber  yard  and  dwelling  rates, 
twenty-five  per  cent.  ;  on  brick  store  buildings  and 
elevators,  from  ten  per  cent,  to  twenty-five  per 
cent.  These  sweeping  reductions  were  not  caused 
by  anti-compact  legislation  or  by  public  clamor  ; 
they  were  made  to  meet  the  increased  competition 
caused  by  two  or  three  profitable  years,  and  in  this 
competition  which  surely  follows  every  profitable 
period  lies  the  safety  of  the  people,  a  safety  that 
legislatures  cannot  make  more  secure. 

In  addition  to  these  important  reductions  in  class 
rates,  every  improvement  in  construction  or  protec- 
tion, external  or  internal,  is  promptly  recognized 
by  adequate  concessions.  A  fire  department  will 
lower  the  rate  on  every  risk  in  a  town  from  10^  to 
50% ;  an  acceptable  sprinkler  system  will  reduce  a 
rate  all  the  way  from  25%  to  75%,  according  to  its 


581 

merits.  Associations  of  experts  are  constantly- 
studying  every  detail  of  construction,  electrical  in- 
stallation and  automatic  devices  of  every  kind  for 
preventing  or  retarding  fires,  also  the  hazards  of 
heating,  lighting  and  motive  power,  as  well  as  the 
properties  of  substances  and  every  invention  that 
has  within  it  latent  possibilities  affecting  the  fire 
hazard.  This  work  is  done  by  disinterested  men 
who  make  physical  hazard  the  study  of  their  lives 
and  who  are  doing  more  to  educate  the  public  and 
more  to  reduce  the  fire  hazard  and  rate  than  all  the 
legislative  bodies  that  have  sat  in  conclave  since 
the  days  of  the  Athenian  areopagus. 

No  intelligent  hian  can  study  fire  underwriting 
and  for  an  instant  admit  the  possibility  of  making 
the  logical,  equitable  rates  the  public  needs  and 
demands  in  any  other  way  than  through  united 
effort.  Fire  companies  are  by  nature  gregarious. 
They  are  thrown  together  in  the  same  agency  ;  as- 
sume the  same  risks  under  identical  forms  of  con- 
tract ;  they  are  interdependent  in  the  matter  of  in- 
spections and  in  case  of  loss  are  compelled  to  unite 
in  its  adjustment,  and  last,  but  not  least,  they  can- 
not make  rates  intelligently  and  fairly  excepting 
from  the  broad  and  enlightened  standpoint  of  com- 
bined experience  over  decades  and  continental 
areas.  The  companies  are  drawn  together  as  the 
atoms  of  matter  are  drawn  together,  and  they  must 


582 

associate  in  their  natural  and  necessary  functions, 
for  it  is  a  law  of  their  being.  This  Association  of 
State  Commissioners  is  simply  an  outgrowth  of  in- 
surance evolution.  You,  too,  are  members  of  the 
great  insurance  brotherhood  and  in  meeting  to- 
gether each  year  you  acknowledge  by  evidence 
stronger  than  words  the  inexorable  necessity  for 
conference  and  united  action  in  the  performance  of 
your  duties,  just  as  we  do  in  the  establishment  of 
rates  and  other  things  essential. 

There  is  a  popular  children' s  game  played  as  fol- 
lows :    A  large  picture  of  a  tailless  mule  is  tacked 
up  against  the  wall  of  a  room.     A  number  of  pic- 
tures of  the  mule's  tail  are  distributed  among  the 
participants,  each  of  whom  in  turn  is  blindfolded 
with  a  handkerchief  and  then  whirled  around  three 
times  to  the  right  and  twice  to  the  left.     The  game 
consists  in  the  attempt  of  the  blindfolded  person  to 
pin  a  tail  to  the  portion  of  the  mule's  anatomy 
where  it  belongs  and  the  result  is  that  when  the 
game  is  over,  mule's  tails  are  pinned  up  in  artistic 
disorder  all.  over  the  room — from  the  mule's  left  ear 
to  the  family  photograph-album.     It  is  a  game  full 
of  amusing  absurdities  and  very  suggestive  of  anti- 
compact  laws.    The  mule  stands  for  the  public,  with 
a  tendency  to  kick  ;  the  tail  is  the  rate  ;  the  blind- 
foldees  stand  for  the  companies ;  the  blindfolders 
tor  the  politicians,  and  the  handkerchief  for  anti- 


583 

compact  legislation.  Yon  will  doubtless  draw 
your  own  inferences,  but  I  venture  to  suggest  that 
a  mule's  tail  is  a  necessary  part  of  its  anatomy  and 
it  ought  to  be  in  the  right  place  as  it  helps  the  looks 
of  the  mule  and  is  useful  in  fly  time.  A  mule  with- 
out a  tail  in  the  right  place  is  more  apt  to  kick  than 
a  mule  with  a  normal  tail  in  its  normal  place  and 
the  companies  can  never  find  the  right  place  so  long 
as  they  are  blindfolded  with  legislative  handker- 
chiefs and  whirled  around  by  political  hoodwinkers 
until  they  have  lost  all  sense  of  distance  and  direc- 
tion. As  a  diversion  the  mule  game  is  funny,  but 
as  business  it  is  and  always  will  be  a  dismal  failure. 


J.  MABBETT  BROWN  : 

I  HAVE  listened  with  great  interest  and  pleasure 
to  the  address  of  Mr.  Dean,  concurring  heartily 
in  all  he  has  said.  The  advantages  to  be  derived 
from  uniform  ratings,  made  by  competent  persons, 
whether  representatives  of  local  boards,  associa- 
tions or  compacts — they  may  be  called  by  whatever 
title  you  please,  and  still  not  be  ''  a  trust,"  as  gen- 
erally termed  by  the  community  at  large — are 
unquestionably  beneficial  to  all  parties  in  interest. 

Jf  all  reliable  fire  insurance  companies  could  or 


584 

would  agree  to  associate  together,  binding  them- 
selves, if  need  be,  under  heavy  bonds  to  adhere  to 
such  certain  rules  and  rates  as  they  may  agree  upon, 
the  rates  to  be  based  upon  a  schedule  made  up  from 
the  combined  experience  of  companies  that  have 
carefully  classitied  their  business  for  a  term  of 
years,  say  at  least  twenty,  would  in  my  opinion, 
after  a  reasonable  trial,  experience  such  an  improve- 
ment in  their  business  and  lind  such  good  results 
that  you  could  not  drive  one  of  them  out  of  the 
association.  Such  association  would  not  and  vir- 
tually could  not  be  "a  trust,"  for  it  is  a  safe 
proposition  to  assume  that  for  the  sake  of  self- 
preservation,  the  rate-making  would  be  placed  in 
the  hands  of  competent  and  experienced  fire  in- 
surance men,  with  instructions  to  make  the  rates 
in  accordance  with  the  hazard  of  the  risk,  as  so 
classified,  and  not  higher  than  was  necessary  to 
give  a  fair  margin  for  profit  on  the  capital  in- 
vested in  the  business  for  the  policy-holders'  pro- 
tection. 

Such  conservative  action  on  the  part  of  the 
associated  companies  would  have  a  tendency  to 
prevent  the  growth,  encouragement  and  increase 
of  irresponsible  fire  insurance  companies  for  the 
time  being,  claiming  to  be  benefactors  to  the  busi- 
ness community,  necessarily  having  a  brief  exist- 
ence and  soon  winding  up  their  career  in  the  han^s 


585 

of  a  receiver.  Such  companies  would  not  be  able 
to  obtain  reinsurance  in  any  of  the  associated  com- 
panies. Thus  they  would  soon  show  themselves 
to  be  incompetent  and  inexperienced  in  the  busi- 
ness, and  to  be  losing  instead  of  making  money 
for  their  stockholders.  If  the  insuring  public  of 
each  State  would  demand  that  the  laws  that  at- 
tempt to  prohibit  the  so-called  compacts  and  asso- 
ciations of  fire  insurance  companies  be.  wiped  out 
of  existence  and  as  much  liberality  shown  towards 
fire  insurance  companies  as  is  shown  to  life  insu- 
rance companies  they  would  quickly  realize  that  it 
was  greatly  to  their  interests. 

Fire  insurance  is  the  sole  protection  in  case  of 
disaster  by  fire  of  the  entire  mercantile  and  manu- 
facturing capital  of  this  and  all  other  civilized 
countries.  The  reliable  and  sound  company  should 
be  fostered  and  encouraged  by  public  opinion  and 
sensible  laws,  not  treated  as  an  alien  and  an 
enemy.  Why  should  such  an  immense  business  as 
fire  insurance  be  the  only  one  that  is  hampered 
with  obnoxious  laws  and  loaded  with  excessive 
taxation  ?  All  of  which  has  a  tendency  to  increase 
rates,  and  such  increase  must  eventually  come  out 
of  the  pockets  of  the  insured.  So  with  the  valued 
policy  law,  not  only  does  it  increase  the  cost  of  in- 
surance by  its  temptation  for  dishonesty,  but  has  a 
demoralizing  effect  upon  the  morals  of  the  people 


686 

by  its  tendency  to  induce  them  to  put  a  fictitious 
value  upon  property  when  insuring,  and  then 
by  means  of  gross  carelessness,  if  nothing  worse, 
selling  it  to  the  underwriters  under  the  provisions 
of  such  pernicious  statutes. 

An  honorable  "  trust,"  as  it  is  called,  never  took 
advantage  of  any  community  ;  they  are  nearly 
always  found  to  be  of  benefit  from  the  fact  that 
they  manufacture  superior  grades  of  goods  at  mini- 
mum cost  and  furnish  them  to  the  people  at  a  much 
less  price  than  they  could  possibly  obtain  them  but 
for  this  combination  of  capital.  So  it  would  be 
with  insurance  compacts  and  ratings,  were  the 
companies  not  hampered  with  laws  and  burdened 
by  taxes  that  no  other  equally  large  interests  suffer 
from.  Success  in  business  and  release  from  oner- 
ous taxation  and  laws  that  lead  indirectly  to  fraud 
and  arson,  would  of  a  necessity  make  rates  lower 
and  the  insurer  reap  a  benefit.  The  State  would 
also  be  benefited  as  it  would  collect  thousands  of 
dollars  in  taxes  upon  the  premiums  received  by  the 
associated  companies,  which  they  now  lose  on 
account  of  premiums  going  out  of  their  domain  into 
the  hands  of  mutuals,  Lloyd's  and  other  unau- 
thorized companies  and  associations  which  can  not 
and  will  not  comply  with  the  law,  as  is  alleged  for 
the  protection  of  insurers,  but  which  are  really  in. 
imical  to  their  best  interests.      Such  companies  are 


587 

not  only  law  breakers,  but  they  invite  and  encour- 
age tlie  citizens  of  the  various  States  to  become  not 
only  law  breakers,  but  tax  evaders  as  well. 

To  illustrate  the  difference  in  the  treatment  by 
our  legislators  of  fire  insurance  capital  and  that  of 
other  large  institutions. 

In  this  city  we  have  many  mammoth  industries  ; 
from  them  I  select  only  two— the  tanneries  and 
breweries.  Their  aggregate  sales  in  1897  were 
$26,000,000  ;  the  brewers  leading  with  $14,000,000, 
and  the  tanners  a  close  second  with  $12,000,000. 
These  interests  are  in  the  hands  of  very  wealthy 
men,  who  would  still  have  large  fortunes  left  even 
if  their  plants  were  uninsured  and  entirely  de- 
stroyed by  fire  ;  but  they  insure  their  property  up 
to  ninety  per  cent,  of  its  value,  make  money  and 
constantly  increase  their  manufacturing  facilities, 
but  they  do  not  take  advantage  of  those  with 
whom  they  do  business,  even  if  they  do  have  their 
own  associations  for  mutual  protection.  They  are 
not  taxed  in  the  same  proportion  as  are  insurance 
companies,  and  we  hear  nothing  about  their  being 
a  ''trust"  or  ''compact." 

A  compact  or  association  of  fire  insurance  com- 
panies, for  the  maintenance  of  fair  and  equitable 
rates  in  accordance  with  the  hazard,  under  a  justly 
discriminating  schedule,  if  it  were  not  prohibited 
by  the  law  of  the  State,  would  be  of  as  much  ben- 


588 

efit  to  the  mass  of  citizens  of  the  United  States  as 
the  much  berated  "  Standard  Oil  Company"  has 
proved  itself  to  be  in  furnishing  its  products  at 
much  less  figures  than  they  paid  previous  to  its 
formation  and  phenomenal  business  success.  Why 
that  success  ?  Simply  for  the  reason  that  it  takes 
no  advantage  of  its  patrons,  but  keeps  prices  so 
low  that  there  can  be  no  competition.  Such  would 
be  the  case  in  the  association  of  the  reliable  and 
responsible  insurance  companies  for  the  making  of 
equitable  rates.  Self-interest  would  compel  them 
to  fix  them  at  such  a  figure  as  would  keep  out  of 
the  business  the  wildcat  affairs  that  take  the  prem- 
iums from  their  victims  and  fail  to  pay  the  losses 
incurred. 

*' Insurance  compacts,"  boards  of  underwriters, 
are  not  formed  simply  for  the  making  of  rates, 
but  take  a  much  wider  scope.  They  are  in  a  great 
measure  a  protection  to  property  and  life,  their 
superintendents  and  inspectors  discover  any  at- 
tempt at  the  storage  of  large  quantities  of  danger- 
ous and  explosive  materials  within  the  limits  of 
towns  and  cities  under  their  jurisdiction,  which, 
although  it  may  be  prohibited  by  city,  town  or  vil- 
lage ordinances,  will  frequently  be  found  just 
where  at  any  time,  should  a  fire  occur,  a  serious 
loss  of  life  and  property  and  the  maiming  of  many 
persons  might  take  place.     They  see  to  it  that  the 


589 

ordinances  are  enforced,  and  if  there  be  no  such 
ordinance  that  they  be  enacted  and  obeyed.     So 
too,  with  building  ordinances  and  others  intended 
for  the  protection  of  the  public  from  the  disasters 
by  fire. 

Within  the  past  year  there  have  been  found  in 
this  city  hundreds  of  places  where  from  fifty  to 
one  hundred  gallons  of  gasoline  were  stored,  with 
families  living  immediately  over  such  magazines  of 
destruction.  What  was  the  remedy  ?  Not  the 
city  ordinance,  because  the  violation  of  such  is 
not  learned  until  the  insurance  companies,  board 
manager  or  inspector  discovers  the  danger,  warns 
the  delinquent,  notifies  the  proper  authorities  to 
enforce  the  law,  and,  until  the  evil  is  removed, 
makes  such  a  rating  for  the  hazard  as  will  cause  the 
owner  of  the  building  to  demand  a  correction  of  the 
evil  for  his  own  protection,  a  penalty  which  the  com- 
pact manager  may  apply  according  to  his  judgment. 

Instead  of  anti-compact  laws  and  laws  prohibit- 
ing the  forming  of  local  boards,  there  should  be  laws 
protecting  such  associations,  possibly  with  some 
proper  restrictions. 

If  such  could  be,  rates  would  be  lower,  the  de- 
struction of  property  by  fire  lessened,  millions  of 
dollars  worth  of  property  saved  that  is  now  burned 
and  can  never  be  replaced,  for  the  property  is 
wasted,  although  the  person  or  persons  be  insured 


590 

and  thus  saved  from  financial  embarrassment  or 
ruin.  Who  is  it  that  objects  to  companies  forming 
associations — compacts,  if  you  choose  to  call  them 
such — for  the  mutual  benefit  of  insurer  and  insured, 
the  making  of  a  fair  and  equitable  rate,  and  the  en- 
forcement of  good  underwriting  practices?  Is  it 
the  liberal,  enterprising  merchant,  manufacturer  or 
capitalist  ?  No,  it  is  as  a  rule  the  narrow,  contracted- 
minded  man  who  knows  nothing  of  insurance  and 
probably  but  little  else  outside  of  his  own  business, 
and  who  is  largely  governed  by  his  prejudices, 
whose  cry  is  "  the  insurance  companies  are  making 
too  much  money  ; "  "we  have  not  had  any  fires  of 
importance  for  years ; "  ' '  rates  should  come  down ; ' ' 
"we  should  not  be  taxed  to  pay  losses  in  other 
parts  of  the  country  ; "  "we  should  be  rated  solely 
on  the  merits  of  our  own  locality." 

Were  this  fellow  asked  the  question  :  "  If  a  fire 
were  to  occur  causing  a  loss  to  insurance  companies 
many  times  the  amount  your  city  or  town  has  paid 
in  premiums,  would  you  be  willing  on  the  rebuild- 
ing of  the  burned  territory  to  pay  an  increased 
rate  sufiicient  to  reimburse  the  companies  for  their 
loss  in  this  locality  within  a  reasonable  time?" 
The  reply  you  can  readily  imagine.  That  would  be 
"a  horse  of  another  color,"  and  he  would  pro 
nounce  such  a  demand  as  outrageous. 

Compact  ratings  equalize  and  adjust  the  cost  of 


591 

insurance,  placing  each  risk  on  its  own  merits.  It 
wrongs  no  one.  It  is  a  benefit  to  the  owner  of  well- 
built  and  well-cared-for  buildings  and  an  induce- 
ment to  those  which  are  poorly  constructed  and 
badly  cared  for  to  improve  them  in  both  respects, 
thus  benefiting  himself  as  well  as  his  neighbors 
whose  property  is  exposed  by  his  poorer  risk. 

The  rate  which  is  made  haphazard  by  one  not 
familiar  with  the  various  hazards  that  affect  the 
risk  may  wrong  and  do  great  injustice  to  an  entire 
community.  It  may  be  so  low  as  not  only  to  tempt 
the  owner  to  over-insure,  but  to  become  careless 
with  his  property.  The  moral  hazard  increases  and 
fires  come,  which  destroy  not  only  his,  but  hun- 
dreds of  thousands  of  dollars  worth  of  other  peo- 
ple's property. 

Would  it  not  be  far  better  to  have  laws  protect- 
ing the  insurance  companies  and  permitting  their 
operation  for  the  purpose  of  correcting  these  evils  ? 
Companies  that  will  use  their  experience  and 
knowledge  of  the  physical  hazards  and  the  sur- 
rounding exposures,  and  fix  such  equitable  rates  as 
will  not  only  guarantee  the  full  payment  of  honest 
losses,  but  also  establish  such  sensible  rules  as  will 
result  in  being  a  preventive  of  many  losses  by  fire. 
The  great  curses — if  I  may  so  call  them— to  the 
insurance  business  are  *  Valued  policy  "  and  *' anti- 
compact"  laws.     They  offer  great  inducements  for 


592 

and  are  the  cause  of  many  fires.  I  know  of  a  case  in 
point,  in  this  city,  where  a  building  on  one  of  the 
principal  streets  is  insured  for  double  its  value. 
Under  the  "Wisconsin  valued  policy  law,"  if  the 
building  was  totally  destroyed,  the  assured  could 
claim  and  collect  the  full  insurance.  I  do  not  say 
that  this  building,  insured  for  double  its  value,  will 
burn,  but  in  the  hands  of  very  many  persons  what 
a  temptation  there  would  be  to  have  it  burn,  and 
with  it,  perhaps,  thousands  of  dollars  worth  of  ad- 
joining property  belonging  to  innocent  parties.  If 
the  State  had  no  anti-compact  or  valued  policy 
laws,  over-insurance  could  be  easily  remedied. 
The  compact  manager  would  then  be  at  liberty, 
and  it  would  be  his  duty  to  inform  all  companies 
of  the  over-insurance.  They  would  have  the  rem- 
edy in  their  hands  and  govern  themselves  accord- 
ingly ;  thus  doing  away  with  the  inducement  for 
burning  the  premises  and  subjecting  other  property 
to  loss  or  destruction. 

Mr.  Dean,  in  his  able  article,  has  said  how  rates 
could  be  made  on  a  fair  and  equitable  basis.  I  will 
therefore  not  trespass  any  further  upon  your  valu- 
able time.  I  would  heartily  recommend  that  all 
you  honorable  commissioners  of  insurance  use  your 
influence  to  abolish  all  laws  mutually  detrimental 
to  insurance  companies  and  their  patrons,  particu- 
larly the  an ti- compact  and  valued  policy  laws. 


RE-INSURANCE   RESERVE  OF  FIRE 
INSURANCE  COMPANIES. 


THOMAS  S.  CHARD  : 

DESIGNATION    OF   THE  ACCOUNT. 

A  DISTINGUISHED  American  humorist,  having  an- 
nounced as  the  subject  of  his  principal  lec- 
ture— ''The  Babes  in  the  Woods,"  thereafter  re- 
ferred no  more  to  those  mythical  infants.  In  like 
manner,  the  theme  assigned  to  me  for  this  occa- 
sion, might  be  dismissed  with  its  mention — for  a 
re-insurance  reserve  belongs  also  in  the  airy- 
realms  of  unreality. 

It  may  be  assumed  that  a  substantial  insurance 
company  does  not  organize  with  any  well-defined 
intention  of  liquidating.  No  such  company  begins 
its  career  by  establishing  a  re-insurance  fund,  any 
more  than  a  healthy  and  sensible  youth  sets  aside 
his  first  earnings  for  funeral  expenses. 

When  we  use  the  term  re-insurance  reserve  we 
have  in  mind — or  should — the  indebtedness  of  insur- 


594 


ance  companies  to  their  policy-holders  for  un- 
earned premiums— and  not  the  sum  necessary  to 
re-insure  the  business  of  the  said  companies. 

In  part,  the  laws  of  many  of  our  States  are  re- 
sponsible for  the    erroneous  designation  of  this 
account.     For  example— the  State  of  Iowa  pro- 
vides that  companies   shall  be    charged  with  the 
amount  required  to  re-insure  all  outstanding  risks 
on  the  basis  of  40  per  cent,  of  the  premiums  on  all 
unexpired  risks.     Liberal,  certainly  ;  but  why  the 
reference  to  re-insurance  ?    Massachusetts  requires 
that  'Hhe  re-insurance  reserve  shall  be  computed 
at    fifty  per  cent,  of  the  premiums   received  on 
fire  and  inland    risks,   and  upon    risks  covering 
more   than    one    passage    not    terminated  upon 
which  the  reserve  is  sixty  per  cent,  except  that 
companies  with  less  than  $300,000  capital   must 
reserve  the  whole  amount  of  marine  and  inland 
premiums."     New  York  avoids  the  use  of  the  term 
and  provides  that  each  company  shall  be  charged 
with  a  sum  equal  to  the  total  unearned  premiums 
on  the  policies  in  force,  calculated  on  the  gross 
sum    (without  any    deduction    on    any    account) 
charged  to  the  policy-holder  for  each  respective 
risk  from  the  date  of  the  issuance  of  the  policy. 

Illinois  debits  companies  with  the  full  amount 
of  their  unearned  premiums,  and  made  no  refer- 
ence to  any  supposed  re-insurance  reserve  until 


595 

the  enactment  of  the  advertising  law  of  1879. 
Therein,  companies  are  required  to  list  among  their 
liabilities  as  published,  "  the  fund  reserved  for 
the  re-insurance  of  outstanding  risks."  The  law- 
does  not  fix  any  standard  for  the  determination  of 
this  fund — nor  specifically  identify  it  with  the  un- 
earned premiums  referred  to  in  previous  sections. 
Missouri  charges  the  amount  required  to  ''safely 
re-insure  all  outstanding  risks — estimated  by  tak- 
ing fifty  per  cent  of  the  gross  premiums  on  all 
unexpired  fire  risks  that  have  less  than  one 
year  to  run."  The  laws  of  Wisconsin  debit  the 
companies  with  "  the  amount  required  to  re-insure 
all  outstanding  risks."  The  following  States  do 
not  (or  did  not  recently)  mention  this  liability, 
but  merely  provide  that  the  proper  oflBicer  shall  re- 
quire such  form  of  statement  as,  in  his  judgment, 
will  clearly  reveal  the  financial  condition  of  the 
companies,  viz.:  Delaware,  Florida,  Indiana, 
Louisiana,  Mississippi,  North  Carolina,  South 
Carolina,  South  Dakota,  Utah,  Yirginia,  West 
Virginia,  Idaho,  Arizona  Ter.  Ohio  definitely  states 
in  her  statutes  that  the  amount  required  for  re-in- 
surance shall  be  equal  to  fifty  per  cent  of  the  whole 
amount  of  premiums  on  unexpired  risks  and  poli- 
cies. Out  of  this  jumble  of  legislation  has  emerged 
the  term  re-insurance  reserve. 


596 


THE  EE-INSURANCE  STANDARD. 

Some  underwriters,  perhaps  misled  by  the  phrase, 
claim  that  they  should  be  debited  with  no  sum  on 
this  account  beyond  that  required  to  re-insure 
their  whole  business  with  a  solvent  company.  To 
this  theory  there  are  two  objections. 

First. — Re-insurance  does  not  relieve  a  com- 
pany from  its  obligations  to  its  policy-holders,  nor 
from  any  portion  of  these  obligations.  The  debt 
to  the  policy-holder  is  measured  by  the  amount  of 
the  premium  unearned,  and  cannot  be  abated  by 
any  considerations  of  good  will  or  expense.  Hence 
the  amount  that  a  third  party  might  be  willing  to 
carry  the  risks  for,  does  not  and  cannot  determine 
the  liability  of  the  original  underwriter  to  his 
client. 

Second. — As  none  could  determine  in  advance 
the  amount  that  would  be  required,  the  theory 
could  not  be  applied.  One  wishing  to  re-insure  an 
unprofitable  business  would  find  his  bonus  meas- 
ured by  the  inexperience  or  greed  of  the  purchaser. 
While,  as  Carlyle  has  said,  ''  There  is  no  known 
head  so  wooden  but  there  are  other  heads  to  which 
it  is  a  genius,"  yet  some  woods  are  softer  than 
others.  The  conflict  of  opinion  on  this  account, 
therefore,  that  might  arise  between  the  inexorable 
Commissioner,  and  the  optimistic  underwriter 
would  be  at  once  bewildering  and  hopeless.    The 


597 

good  will  of  certain  long-established  companies  that 
have  a  carefully  selected  business  is  worth  nearly 
as  much  as  the  sum  of  their  unearned  premiums. 
Hence,  were  the  cost  of  re-insurance  the  test,  this 
liability  would  be  set  down  in  the  statements  of 
many  old-line  companies  at  an  amount  largely 
below  the  sum  actually  due  the  policy-holders, 
and  therefore  below  the  debit  now  acknowledged. 

THE   LOSS-RATIO  STANDARD. 

It  has  been  suggested  that  the  re-insurance  liabil- 
ity of  a  company  be  estimated  on  the  basis  of  its 
loss  experience.  This  experience  however  is  deter- 
mined by  a  number  of  transient  causes — among 
them  current  income.  The  business  of  Company 
''A"  with  a  sixty  per  cent,  loss  ratio  to  premiums, 
on  a  decreasing  income  may  be  more  profitable  than 
that  of  '*  B  "  whose  loss  ratio  is  fifty  per  cent,  on  a 
rapidly  increasing  income.  Reduction  in  unearned 
premium  liability  may  more  than  offset  the  smaller 
ratio.  Companies  are  always  experimenting  and  a 
high-loss  ratio  may  be  the  result  of  unfavorable 
experiences  with  certain  classes  leading  to  their 
abandonment.  The  company  with  the  lower  ratio 
inspired  with  the  egotism  of  success  may  in  turn 
try  and  abandon  the  same  experiment. 

Insurance  is  the  seesaw  of  wisdom  and  folly. 
Aside  from  this,  natural  and  uncontrollable  causes 


698 

operate  to  produce  great  fluctuations  in  the  loss 
ratios  of  even  the  companies  that  pursue  the  stead- 
iest policy.  To  illustrate  this,  take  the  experience 
of  a  few  leading  insurance  companies  whose  busi- 
ness relations  extend  over  the  entire  country. 

Based  on  Net  Premium  Receipts. 

Loss  Ratios 

1893  to  1897. 

Low  High 

Aetna,  Conn 49-5  61-4 

American,  Pa 54-3  93-9 

Connecticut...' 47-9  66-5 

Continental,  N.  Y 47-0  60-3 

Fire  Association,  Pa 50-9  76-6 

Fireman's  Fund,  Cal 52-8  61-2 

German  American,  N.  Y 45-5  63-6 

Germania,  N.  Y 37-3  57-1 

Hanover,  N.Y 50-7  107-4 

Hartford.  Conn 48-9  56-9 

Home,  N.  Y 48-3  66-7 

Ins.  Co.  of  N.  A.,  Pa 61-9  76-3 

National,  Conn 46-3  60-3 

Niagara,  N.  Y 45-6  75-7 

Phenix.N.  Y 54-5  68-1 

Phoenix,  Conn 56-5  73-1 

Springfield,  Mass 46-3  70-7 

A  low-loss  ratio  may  cause  recklessness  leading 
to  a  high  ratio  which  in  turn  may  produce  conser- 
vatism. Hence  present  ratios  afford  no  certain 
standard. 

RATIO  OF  RESERVE  TO   AMOUNT  AT  RISK. 

Some  underwriters  have  contended  that  compan- 


599 

ies  should  be  required  to  compute  their  reserve  on 
the  basis  of  the  amount  written  rather  than  on  the 
premium  income.  Due  reflection  will  show  that 
such  contentions  are  fallacious.  The  ratio  of  re- 
serve to  amount  at  risk  is  determined  by  the 
character  of  the  business.  It  increases  in  the  pro- 
portion that  companies  write  high  rated  annual 
and  term  risks.  The  company  quoted  in  the  Wis- 
consin reports  as  having  the  highest  ratio  of  re- 
serve to  risk  (1.53)  writes  only  in  the  Western  States 
where  rates  are  high  because  hazards,  ^re  great. 
The  company  showing  the  smallest  ratio  of  reserve 
to  risk  (83cts)  in  1897  writes  chiefly  in  well-built 
brick  cities.  Two  companies  therefore  may  have 
an  equal  amount  at  risk  yet  the  reserve  of  the  one 
may  be  double  that  of  the  other,  the  statements  in 
each  case  being  just.  Amount  written  in  such  in- 
stances gives  no  clue  as  to  the  amount  due  holders 
of  unexpired  policies  or  even  as  to  adequate  reserve 
for  losses,  if  the  unearned  premium  fund  were  sup- 
posed to  be  established  for  that  purpose. 

UlS^IFOKM   EATES   AND   CLASSlFICATIOlSrS. 

There  is  a  view  respecting  this  debit  that  has 
been  approved  by  eminent  actuaries,  and  that  has 
received  the  qualified  endorsement  of  a  body  of 
your  predecessors,  namely,  that  there  should  be  a 
standard  of  rates  by  which  to  measure  the  so-called 


600 

re-insurance  reserve.  In  the  year  1881  the  subject 
was  discussed  at  the  Detroit  Conference  of  Super- 
intendents and  Commissioners  of  Insurance,  and 
reported  on  by  a  committee  of  which  the  Honor- 
able Julius  L.  Clarke  of  Massachusetts  was  chair- 
man.    I  quote  as  follows  : 

"  Technically  speaking,  reserves  should  be  based 
upon  rates  which  correctly  measure  the  risks 
assumed,  and  not  on  those  received  in  the  heat 
and  strife  of  competition.  But  for  the  establish- 
ment of  such  a  measure  there  is  no  collection  of 
statistics  now  extant  which  commands  the  con- 
fidence of  the  profession.  The  most  intelligent 
and  reliable  source  of  information  would  seem 
to  be  properly  classified  returns,  and  these  can 
be  best  made  by  companies,  of  business  ^  done  by 
themselves,  rather  than  by  observation  made 
upon  risks  at  large.  It  is  believed,  moreover, 
that  the  acquirement  of  such  data  would  involve 
at  least  five  years  of  patient  labor.'' 

Had  the  committee  undertaken  the  work,  the 
ideal  rate  might  have  been  evolved  at  about  the 
time  that  the  legislatures  were  evolving  the  anti- 
compact  laws.  Were  such  rates,  however,  obtain- 
able, their  value  as  a  measure  of  reserve  would  be 
dubious.  Hazards  change.  As  the  large  wheel  of  a 
wagon  follows  the  small  one,  so  invention  follows 
the  age.     Hardly  an  industry  is  stationary  long 


601 

enough  to  furnish  an  average.  To  make  the  fugi- 
tive elements  in  the  history  of  any  class  the  basis 
of  an  average  wherewith  to  measure  reserves, 
would  be  like  striking  an  average  of  the  combined 
ages  of  a  dodo,  a  turtle  and  a  mule  ;  when  ob- 
tained, it  would  be  inapplicable  to  any  creature 
known  to  man.  An  average  is  mainly  serviceable 
when  the  factors  remain  substantially  identical 
throughout  the  selected  period,  and  survive 
unchanged  to  be  dealt  with  according  to  past 
results. 

Since  Job  said  :  ' '  My  days  are  swifter  than  a 
weaver's  shuttle,"  and  David  sang,  ''  Our 
years  are  three  score  years  and  ten,"  a  steady 
stream  of  light  has  poured  upon  the  question 
of  the  average  duration  of  life  and,  in  our  times, 
of  insuring  it.  Yet  a  learned  authority  has 
said  to  this  convention  :  ''  Mortality,  expense,  and 
interest,  are  constantly  variable  factors.  Their 
variations  are  incapable  of  previous  demon- 
stration. ^  ^  -^  We  must  be  reasonably  sure 
that  we  are  somewhat  overcharging  (for  life  insur- 
ance) or  we  are  not  reasonably  sure  that  we  are 
charging  enough."  If  such  uncertainty  follows 
that  interest,  how  much  more  does  it  pursue  fire 
insurance,  whose  factors  change  with  kaleidoscopic 
facility,  whose  dealings  are  with  innumerable  dis- 
similar and  novel  classes,  and  whose  fortunes  are 


602 

shaped  by  the  invisible  hand  of  moral  hazard  !  We 
may  not  expect  here  an  exact  science. 

"  The  unfinished  window  in  Aladdin's  tower 
Unfinished  must  remain." 

Experience  tables  for  measuring  the  so-called  re- 
insurance reserve,  if  compiled,  I  believe  would  be 
used  as  the  entering  wedge  for  State  insurance. 
Some  writers  of  prominence  have  urged  that  the 
State  furnish  indemnity  against  fire  loss  on  the 
basis  of  cost  shown  by  such  tables.  In  the  case  of 
the  life  insurance  companies  their  mortality 
tables  deduced  from  universal  experience  offer  mel- 
ancholy testimony  to  the  fact  that  ''all  flesh  is 
grass.  "  The  experience  of  these  companies,  how- 
ever, reveals  an  intelligent  and  justifiable  prefer- 
ence for  the  grass  that,  far  as  possible,  is  removed 
from  hay.  The  fire  insurance  companies  on  the 
other  hand  cannot  work  from  the  theorem  that  all 
risks  burn  ;  but  in  absence  of  universal  records  they 
must  let  the  part  stand  for  the  whole,  and  accept 
as  the  basis  of  their  estimates,  the  selected  business 
on  their  books.  Under  the  stress  of  competition, 
however,  rates  will  equalize,  whatever  the  system. 
It  would  be  suicidal  to  use  fire  insurance  rates, 
based  upon  experience  with  selected  risks,  as  a 
guide  to  the  value  of  all  risks  accepted  without  dis- 
crimination by  public  officials.  Moreover,  while 
there  is  a  general  average  of  rate  as  to  each  class,  it 


603 

is  also  true  that  no  two  members  of  the  class  have 
the  same  value.  Discriminative  judgment,  there- 
fore, is  indispensable,  and  this,  under  a  State  sys- 
tem, would  lead  almost  certainly  to  unfair  manip- 
ulation and  rates  influenced  by  "pulls."  For 
there  is  no  reason  to  suppose  that  fire  taxes  would 
be  collected  any  more  equitably  than  are  other 
taxes  whose  assessment  is  the  reproach  of  the 
times. 

Yet,  valuable  as  are  experience  tables,  they  are 
the  tools — not  the  product ;  the  scaffolding — not 
the  building ;  and  he  who  should  mistake  himself 
for  an  underwriter  because  he  possessed  such  a 
table,  would  be  as  one  who  fancied  himself  a  car- 
penter because  he  owned  a  saw. 

Experience  tables  also  are  valuable  only  while 
modern.  Some  underwriters  still  cherish  class- 
ifications of  great  age  which  contain  the  dross  of 
many  hazards  long  extinct — classifications  like  the 
mysteries  of  Eleusis  sacred  and  valueless. 

NATURE   OF   THE   DEBIT. 

One  argument  which  influenced  the  able  com- 
mittee from  whose  report  I  have  quoted,  runs  thus  : 
Two  companies  accept  each  a  risk  of  $1,000  on  the 
same  mill.  One  charges  5%,  receives  $50.00,  reserves 
$25.00.  The  other  charges  S%  receives  $30.00,  re- 
serves $15.     Hence   that  under  present  systems  a 


604 

reserve  diminishes  in  the  proportion  that  the 
necessity  for  it  increases. 

But,  in  the  case  cited,  the  company  receiving 
the  $30.00  having  earned  the  half  owes  only  the 
other  half  however  foolish  the  bargain,  whilst  the 
company  receiving  the  $50.00  owes  all  of  $25.00 
were  the  contract  the  acme  of  wisdom. 

Such  arguments  (for  rate  standards)  assume  that 
the  unearned  premium  reserve  is  a  provision  for  the 
payment  of  losses,  whereas  it  is  merely  the  meas- 
ure of  a  present  liability  for  premiums.  One  debt 
cannot  properly  be  considered  a  reserve  to  pay 
another.  The  underwriter  should  not  rob  Peter  to 
pay  Paul.  To  Caesar  he  should .  render  Caesar's 
things. 

Moreover,  if  to  secure  the  holders  of  outstanding 
policies  the  State  should  establish  a  standard  of 
rates,  it  should  for  like  reason  maintain  a  standard 
of  expense.  Whether  a  rate  is  or  is  not  adequate 
may  depend  upon  economy  of  management.  Be- 
cause of  this,  one  company  often  thrives  upon  rates 
that  send  another  company  to  the  receiver.  Such 
insurance  details  are  too  complex  for  any  judg- 
ment but  that  of  trained  underwriters  stimulated 
by  self-interest.  Governmental  paternalism,  there- 
fore, would  seem  out  of  place  along  this  line.  It 
would  need  to  hold  too  many  reins. 

Before  dismissing  this  branch  of  the  subject,  let 


605 

me  ask  your  attention  to  the  fact  that  the  occur- 
rence of  a  loss  changes  the  status  of  the  policy- 
holder as  to  the  underwriter.  If  a  loss  is  partial, 
the  company  earns  the  premium  jpro  fanto.  If  it 
be  a  total  loss*  there  is  no  longer  any  premium  due 
the  policy-holder.  He  ceases  to  have  any  interest 
in  the  "re-insurance  reserve."  His  policy  would 
not  be  included  in  any  schedule  were  his  debtor 
company  to  re-insure,  and  he  has  np  claim  for  un- 
earned premium,  because  when  his  loss  is  paid,  the 
underwriter  has  discharged  the  entire  undertaking, 
and  there  is  nothing  left  to  earn.  The  policy  is 
always  surrendered  when  a  total  loss  is  paid. 

It  is,  therefore,  to  the  capital  and  surplus  repre- 
senting also  the  earned  premium  that  all  must 
look  for  satisfaction  whose  premiums  have  been 
earned  by  fire.  Fortunately,  at  this  time,  the  sur- 
plus is  ample,  and  there  is  no  occasion  for  loading 
the  unearned  premium  account  with  a  fictitious  lia- 
bility. According  to  the  last  Wisconsin  reports, 
the  fire-insurance  companies  transacting  business  in 
the  State,  had  $100,089,845  of  net  surplus,  and  their 
annual  premiums  were  $124,651,418.  On  this  basis 
they  could  expend  $1.15  for  every  dollar  of  pre- 
miums for  over  five  years  before  reaching  their  ag- 
gregated capital.  Long  before  the  end  of  that 
period,  the  insurance  commissioners  on  the  one 
hand,   and  the  stockholders  on  the  other,  would 


606 

bring  to  an  end  the  conditions  leading  to  such  a 
loss,  or  relieve  the  insurance  business  of  the  officials 
who  were  responsible  for  its  continuance. 

TEEM   RISKS.     * 

Holding  as  I  do  that  the  so-called  re-insurance 
reserve  merely  measures  the  underwriter's  debt  for 
unearned  premiums,  I  believe  that  all  efforts  to 
make  it  conform  to  any  arbitrary  standard  of  rates, 
or  to  determine  it  by  the  unascertainable  cost  of 
re-insurance,  are  wide  of  the  mark.  For,  on  the 
one  hand,  the  same  standard  applied  to  the  classes 
written  by  one  company  will  yield  a  profit  that, 
applied  in  the  case  of  another  company,  will  show 
a  loss,  the  selective  skill  of  the  several  underwriters 
making  the  difference  in  result.  And  as  to  the  re- 
insurance tests — good  will  and  expense — which  fig- 
ure largely  in  such  contracts,  cannot  be  admitted 
to  diminish  the  liability  to  the  policy-holder. 

While  f hus  contending,  I  am  not  prepared  to  fa- 
vor the  policy  of  indifference  as  to  term  insurance. 
Years  ago,  that  able  underwriter,  D.  A.  Heald  of 
New  York,  called  attention  to  the  excessive  growth 
of  the  percentage  of  term  risks,  and  sounded  the 
note  of  warning.  Since  that  time  the  drift  has  in- 
creased. The  companies  whose  business  is  repre- 
sented in  the  following  illustrative  table  are  or 
were  those  operating  in  New  York    State,  and  the 


607 


table  itself — minus  the  percentages — will  be  found 
in  the  proceedings  of  the  National  Board  of  Fire 
Underwriters.  Risks  written  for  two  and  four 
years  represent  so  small  a  percentage  of  the  whole 
that  they  are  not  tabulated.  The  record  of  1860  is 
also  given  by  way  of  showing  the  contrast  with  the 
current  business. 

Outstanding  Risks  at  the  End  of  Each  Year  Noted. 


Year 

Total  Risks 
In  Force 

Annual 

Risks  or 

Short   Term 

Per 
Cent. 
An- 
nual 

Three  Year 
Risks 

Per 

Cent. 

3  Year 

Five  Year 
Risks 

Per 

Cent. 

5  Year 

1860 

$1,345,004,487 

$1,267,981,136 

94.27 

$20,157,296 

1.50 

$56,866,055 

4.23 

1880 

7,024,034,461 

4,.594,108,032 

65.41 

1,528,178,928 

21.75 

762,994,229 

10.86 

1881 

7,877,287,723 

4  995.280.779 

63.41 

1,760.038,721 

22.34 

976,923,122 

12.39 

1882 

8.544.497  024 

5.240,973,510 

61.33 

2.052,460,376 

24.02 

1,083,529,841 

12  68 

1883 

9,401,867,503 

5,564,510,013 

59.18 

2,343,365,184 

24.92 

1,309,282,203 

13.92 

1884 

9.751,099,810 

5,390.179,917 

55.33 

2,655,177.433 

27.22 

1,512.365,460 

15.50 

1885 

10.366,430.239 

5,458,151,259 

52.65 

2,985,800,866 

28.80 

1,731,974,061 

16  70 

1886 

11,189,989.673 

5,766,152,632 

51.53 

3,302.859,618 

29.51 

1,934,404,415 

17.20 

1887 

11,834,860,559 

.'-,,888,577,550 

49.75 

3,629.327,399 

30.66 

2,073,141.331 

17.51 

1888 

12,687,769,709 

6,085,712,188 

47.96 

4,120,132,056 

32.47 

2.213,614,583 

17.45 

1889 

13.413,933.074 

6,279,086,941 

46.80 

4.519.767,939 

33.69 

2,351,972,004 

17.58 

1890 

14.860,244,531 

6.843,728,682 

46.05 

5,073,549.127 

34.14 

2,669,023,461 

17.96 

1891 

15,700.631,991 

7,031,994,214 

44.78 

5.505,572.706 

35.06 

2,862,387,148 

18.23 

1892 

16,686,017,337 

7,555,282.157 

45.28 

5,888.452.078 

35.29 

2.910,383.354 

17.44 

1893 

16,894.003.775 

7,438.275,328 

44.03 

6,187.399,864 

40.17 

2.932,541,252 

17.86 

1894 

16,860,572.393 

7,161.456,909 

42.47 

6,431.306,798 

38.14 

2,942,548,854 

17.48 

1895 

17,470  582,099 

7,500,757.137 

42.95 

6.754,142,726 

38.66 

2.879,805,744 

16.48 

1896 

18,027,509.488 

7,667,293.201 

42.53 

7,138,434,411 

39.59 

2,S77,761,218 

15.96 

1897 

18,878.075,387 

8.058,476,892 

42.68 

7,591,893,884 

40.21 

2,904,621,345 

15.38 

It  will  be  seen  that  one  year  or  less  term  busi- 
ness has  declined  from  94. 27  per  cent,  of  the  whole 
premiums  in  1860  to  42.68  per  cent,  in  1897,  and 
that  the  percentage  of  term  premiums  is  prac- 
tically now  ten  times  that  of  the  earlier  date. 

If  no  man  can  tell  what  the  morrow  shall  bring 
forth,  much  less  can  he  foretell  the  changes  of  the 
next  three  or  five  years.     Yet  the  varying  experi- 


608 

ences  of  that  period  will  affect  nearly  sixty  per- 
cent, or  over  ten  billion  dollars,  of  the  under- 
writer's risks. 

It  may  be  that  some  up- turn  will  load  with 
peculiar  moral  hazard  the  very  classes  now  freely 
written  for  long  terms — or  invention  may  augment 
their  physical  hazard  with  lighting,  and  heating 
appliances  now  unknown. 

At  this  time  fundamental  problems  are  discussed 
widely,  often  bitterly,  and  much  that  passes  as 
humanitarianism  is  anarchy  in  disguise.  How 
far  unhealthy  sentiment  will  be  restrained  by  the 
sober  sense  of  the  people,  and  how  far  it  will 
materialize  in  oppressive  legislation,  none  can  tell. 
It  is  certain  that  those  are  abroad  who  seek  pre- 
ferment by  fomenting  prejudice  against  corpora- 
tions, and  diligently  search  in  halls  of  legislation 
for  the  "  last  straw."  Such  schemers  do  not  know 
that  insurance  is  the  repository  of  a  vast  trust- 
fund  belonging  to  the  people.  They  do  not  know, 
nor  care,  when  they  break  the  pitcher  at  the 
fountain,  whose  waters  will  be  wasted  in  the 
sand. 

To  you,  gentlemen,  charged  with  high  responsi- 
bilities, these  facts  would  seem  of  interest.  In 
view  of  its  present  status  you  may  authorize  a 
company  to  do  business  in  your  States  in  1898. 
Yet  nearly  sixty  per  cent,  of  its  now  assumed  lia- 


609 

bilities  will  rest  on  securities  other  than  those  you 
certify.  What  the  status  of  the  company  will  be 
in  1901  or  1903  you  cannot  tell.  All  insurance 
contracts  must  run  into  the  future,  but  if  super- 
vision is  justifiable  on  sound  commercial  principles 
it  should  require  one  of  two  things — either  a  time 
limit  on  policies,  that  there  may  be  maintained 
some  contemporaneous  relationship  between  the 
liability  and  the  security  on  which  it  is  based ; 
or  such  exceptional  strength  of  capital  and  net 
surplus  as  to  give  reasonable  assurance  of  ability 
to  meet  claims  that  in  the  long  future  may  arise 
under  present  contracts. 

At  this  time,  after  providing  for  the  unearned 
premiums  on  the  legal  basis,  companies  do  not  con- 
cern themselves  to  maintain  any  established  ratio 
between  the  liability  assumed  under  term  policies 
and  the  sum  of  their  capital  and  net  surplus. 
Some  companies  have  of  net  assets  less  than  40 
cents  for  every  hundred  dollars  at  risk  for  long 
terms.  Such  ratios  grade  up  to  four  and  ^ve  per 
cent  exhibited  by  other  companies.  The  ten  largest 
American  fire  insurance  companies  had  (Dec.  31, 
1896)  $1.16  of  capital  and  net  surplus  for  every 
$100  of  term  liability.  It  would  seem  as  if  this 
ratio  should  be  low  enough  to  satisfy  the  conser- 
vatively ambitious.  The  term  of  liability  is  apt  to 
grow  longer  in  the  proportion  that  the  rates  grow 


610 

shorter,  a  fact  that  gives  another  reason  for  watch- 
ing carefully  this  item. 

There  are  indications,  however,  that  five-year 
risks  have  touched  their  limit  of  proportionate 
increase.  While,  because  of  competition  and  to 
meet  the  views  of  mortgage-holders,  the  under- 
writer in  a  measure  has  felt  obliged  to  write  such 
risks,  he  is  beginning  to  see  that  prudence  requires 
a  modification  of  his  practice  in  this  respect.  It  is 
the  belief  of  eminent  financiers  that  the  rate  of 
interest  in  this  country  will  continually  tend  down- 
ward. At  even  the  rate  of  4  1/2^  interest,  and 
with  four  annual  premiums  paid  in  advance,  the 
difference  is  decidedly  against  the  underwriter  who 
accepts  a  five-year  rather  than  five  annual  contracts. 
Discarding  expenses  from  consideration,  and  credit- 
ing each  premium  with  interest  at  4  1/2  per  cent, 
a  $5, 000-five-year  policy,  at  one  per  cent  per  annum, 
would  yield  $249.12,  and  five  annual  policies  on  the 
same  risk  would  yield  $284.87,  a  difference  of  $35.- 
75  against  the  term  transaction.  We  assume  that 
the  underwriter  collects  four  annual  premiums  on 
the  five-year  policy,  whereas  it  is  common  practice 
to  write  such  risks  for  three  annual  terms. 

It  is  proper  to  state,  that  while  the  premium  re- 
ceipts of  the  companies  in  general  have  not  in- 
creased since  1893,  the  unearned  premium  set  apart 
by  any  company  on  the  first  of  the  year  since  that 


611 

date,  has  seldom  failed  largely  to  exceed  in  amount 
the  loss  payments  for  that  year.  Where  the  annual 
losses  habitually,  or  even  frequently,  exceed  the 
annual  reserve,  and  the  fact  is  not  accounted  for 
by  a  largely  increasing  business,  the  explanation 
may  be  that  the  management  lacks  conservatism, 
or,  that  the  reserve  may  be  computed  erroneously. 
Whatever  the  reason,  the  prudent  commissioner 
should  seek  it.  As  each  premium  dollar,  theoreti- 
cally, covers  forty  cents  of  expense  and  profit,  it 
follows  that  a  reserve  based  upon  the  unearned 
portion  of  the  whole  dollar,  should  cover  a  fire  loss 
estimated  to  consume  but  sixty  per  cent,  of  it. 

A  glance  at  the  reserves  of  twenty-five  leading 
companies  shows  that  none  estimates  its  unearned 
premiums  at  less  than  seventy  per  cent,  of  the 
amount  of  its  annual  premium  receipts.  While 
this  ratio  will  vary  largely  because  of  the  cultiva- 
tion or  discouragement  of  term  risks,  my  view  is 
that  save  in  the  case  of  new  companies  writing  only 
short  and  annual  risks,  a  sixty-five  per  cent,  ratio 
of  unearned  premium  reserve  to  annual  premium 
receipts,  unless  there  has  been  a  heavy  decrease  in 
term  writings,  is  minimum  for  safety,  and  if  the 
ratio  falls  much  below  that  figure,  the  commissioner 
should  '^  watch  out."  One  of  the  worst  insur- 
ance failures  of  modern  times  occurred  in  the  case 
of  a  company  that  had  regularly  reported  its  un- 


612 

earned  premiums  at  a  figure  which  was  less  than 
fifty  per  cent,  of  its  annual  premium  receipts. 

COMPUTATIONS   APPROXIMATE   ONLY. 

We  may  as  well  admit  that  all  statements  as  to 
unearned  premium  liability  are  approximate  only. 
It  would  be  impossible  to  fix  the  exact  liability, 
unless  one  knew  the  status  of  every  one  of  thou- 
sands of  living  policies,  and  could  apply  that  know- 
ledge by  instantaneous  calculation.  The  law, 
therefore,  recognizes  the  limitations  of  the  mind, 
and  gives  us  a  system  of  averages. 

This  system  assumes  that  all  living  risks,  writ- 
ten for  the  term  of  one  year  or  less,  have  earned  at 
the  end  of  the  year,  on  the  average,  one-half  of  the 
premium,  and  that  all  living  risks  written  for  a 
term  exceeding  a  year  have  earned  their  pro  rata  of 
the  premium,  according  to  the  time  they  have  run. 

MINOR  DEFECTS    IN    SYSTEM. 

Though  arbitrary  and  inaccurate,  certainly  as  to 
annual  risks,  this  method  is  perhaps  fairly  safe  in 
most  cases.  Yet,  where  a  business  is  increasing 
rapidly,  the  reserve  fails  of  sufficiency  and  is  more 
than  required  where  the  income  is  decreasing.  One 
objection  to  the  system  as  applied  is,  that  it  ad- 
mits of  thimble-rigging.  It  would  be  possible  for 
a  company  in  unsafe  condition  to  re-insure  a  large 


613 

portion  of  its  business,  for  a  day  or  two,  at  the  end 
of  the  year  with  some  confederate,  thus  reducing 
artificially  its  legal  debit — or,  it  might  at  that  time 
suddenly  take  on  by  re-insurance  a  large  vol- 
ume of  business.  While  an  insurance  commis- 
sioner might  not  object  to  such  financiering  as  be- 
ing obnoxious  to  the  law,  I  think  he  might  say  to 
the  underwriter,  as  the  orthodox  Quaker  said  to 
the  burglar — ''Friend,  I  am  sorry,  but  thee  is  just 
where  I  am  going  to  shoot." 

Were  the  annual  statement  to  include  a  record 
of  re-insurance  received  and  placed  by  months, 
such  manipulations,  if  they  have  been  practiced, 
would  be  discouraged. 

In  former  days  it  was  somewhat  usual  to  include 
a  policy-fee  in  the  premium.  The  net  amount,  be- 
ing reported  to  the  company,  was  made  the  basis 
of  the  re-insurance  computation,  though  the  lia- 
bility of  the  company  to  the  assured  was  based  on 
the  larger  sum.  It  is  to  be  feared  that  some  com- 
panies, wishing  to  wink  at  the  unfair  practices  of 
their  agents,  have  accepted  notices  of  premium  re- 
bates, which,  never  having  been  paid  to  or  expected 
by  the  assured,  were,  in  effect,  an  increase  of  com- 
pensation to  the  agent.  If  we  are  to  have  a  recog- 
nized liability  for  unearned  premium — let  the 
account  represent  square  transactions,  without  de- 
ductions for  any  improper  or  under-handed  allow- 


614 

ances  to  any  person,  whatsoever.  On  the  other  hand, 
the  account  should  not  serve  as  the  hiding  place  of 
any  sinking  fund  held  against  the  day  of  adversity. 

INTEREST   ON   UNEARNED   PREMIUMS. 

In  estimating  trade  profit  the  interest  earnings  of 
the  unearned  premiums  are  usually  ignored.  Per- 
haps because  it  is  impossible  to  determine  such 
earnings  accurately.  In  truth  the  whole  sum  of 
unearned  premiums  is  never  at  interest. 

In  the  case  of  marine  premiums  the  gross  pre- 
miums are  charged  to  the  underwriter  as  being  un- 
earned, though  a  considerable  part  thereof  has  been 
earned  on  outstanding  policies. 

The  following  computation  may  help  us  to  some 
approximation  to  the  interest  earnings  on  this  ac- 
count. It  is  based  on  the  statements  of  ten  leading 
fire  insurance  companies  made  to  your  departments, 
December  31,  1896.  Their  reports  show  : 
Assets  at  interest  Dec.  31,  1896  .       $59,577,105 

Capital  and  net  surplus    .         .       '.  36,453,845 

Income  from  interest,  dividends  and 

rents 2,701,134 

Premiums  in  hands  of  agents        .        .      5,365,213 
Cash  on  hand  and  in  banks        .        .         4,027,757 
Unearned  premiums        ....    28,332,272 
Average  per  cent  interest  on  assets  at 
interest 4.534 


615 

The  ten  companies  are  representative  and  their 
experience  will  stand  fairly  well  for  that  of  all 
well-managed  underwriters. 

As  will  be  seen  $5,365,213  premiums  had  not 
been  paid  over  to  the  head  offices  if  collected  by 
the  agents.  Cash  of  $4,027,757  represented  also  a 
non-interest  bearing  fund.  Some  of  this  sum  no 
doubt  came  from  interest  or  dividends  ;  but  as  state- 
ments are  made  just  before  dividend  day,  it  is  safe  to 
say  that  nearly  the  whole  amount  of  cash  on  hand 
December  31,  was  derived  from  current  premiums. 
A  small  percentage  of  the  premiums  uncollected, 
or  in  the  hands  of  agents  was  earned,  say  one- 
twelfth,  giving  us  $4,918,112  as  the  unearned  por- 
tion of  the  uncollected  premium,  which  added  to 
cash  is  $8,945,869. 

We  have  found  that  the  unearned  premiums  of 
the  ten  companies  amounted  (Dec.  31,  1896)  to 
$28,332,272.  From  the  assured' s  standpoint,  the 
underwriter  would  seem  to  be  earning  interest  on 
this  whole  sum,  less  amount  uncollected  premiums 
and  cash  uninvested.  But,  like  other  mortals,  the 
underwriter  ' '  cannot  have  his  cherries  and  eat 
them  too."  If  he  expends  thirty-five  cents  of  ex- 
pense to  secure  $1.00  of  premium,  only  sixty-five 
cents  of  interest-bearing  funds  can  remain.  This 
is  as  true  of  the  portion  of  the  dollar  that  remains 
rned  as  it  is  of  that  which  is  earned.     Elimin- 


616 

ating,  therefore,  $9,916,295  which  is  35%  of  the 
$28,332,272  unearned  i^remiums,  we  have  left 
$18,415,977  or  a  net  residue  of  $9,470,108  after  de- 
ducting also  the  uncollected  premiums  and  cash  on 
hand  already  noted.  Assuming  that  this  sum 
earns  the  average  interest  rate  of  4.53^  we  have 
$429,003  or  seventy  two  cents  on  each  $100.00  of 
the  entire  interest-bearing  assets  of  the  companies  ; 
or  again,  a  sum  equal  to  1.18^  interest  on  the  com- 
bined capital  and  surplus  of  the  ten  companies. 

We  have  here  assumed  that  the  sum  reported  as 
uncollected  premiums  by  these  companies  at  the 
end  of  the  year  is  about  a  fair  average  of  such 
delinquencies  from  month  to  month.  In  fact  the 
amount  uncollected  at  the  end  of  the  year  and 
therefore  not  at  interest  would  be  considerably  smal- 
ler than  the  average  sum  outstanding.  At  that 
season  delinquents  are  under  unusual  pressure  to 
make  good  unpaid  accounts.  This  consideration 
would  reduce  still  further  our  interest  estimate. 
Enough,  however,  may  have  been  shown  to  clear 
away  some  current  errors  and  indicate  that  the  rev- 
enues from  this  source  are  less  than  generally  sup- 
posed. 

OANCELT4ATIONS--MAXIMUM  LIABILITY. 

The  unearned  premiums  of  a  company  are  held 
in  trust  subject  to  conditions  respecting  termination 


617 

which  are  not  considered  in  the  legal  reserve.  The 
law  assumes  that  all  risks  not  carried  to  their  origi- 
nal termination  will  be  cancelled  at  the  instance  of 
the  underwriter.  Hence  the  Company  is  charged 
in  all  cases  with  the  full  pro  rata  of  the  premium 
for  the  unexpired  term. 

While  by  far  the  larger  number  of  policies  expire 
uncancelled,  perhaps  somewhat  over  ten  per  cent,  of 
the  premium  is  returned  by  cancellations  to  policy 
holders.  But  a  small  fraction  of  this  sum  is  charge- 
able to  the  wish  of  the  underwriter.  Generally  he 
is  quite  willing  to  retain  such  risks  as  are  on  his 
books.  He,  therefore,  usually  receives  through 
short  rates  a  larger  share  of  the  premium  than  is 
credited  to  him  in  the  legal  reserve. 

For  all  practical  purposes,  however,  the  under- 
writer should  be  charged  with  his  maximum  liabi- 
lity as  in  event  of  bankruptcy  that  would  measure 
his  debt. 

Under  a  strict  construction,  so  long  as  the  under- 
writer's  obligation  to  his  policy-holders  cannot  be 
diminished,  as  to  them,  by  any  act  to  which  they 
are  not  parties,  it  might  be  questioned  whether 
his  unearned  premium  account  should  be  credited 
with  any  re-insurance.  However,  custom  has  so 
established  the  practice  that  its  interruption,  in 
many  cases,  would  be  a  hardship. 

The  security  of  any  company  for  the  purpose  of 


618 

re-insurance  credit,  may  well  be  accepted  if  that 
company  has  submitted  its  affairs  to  examination 
by  duly  constituted  State  authorities,  and  has  been 
approved  as  solvent.  But  it  would  not  seem  good 
practice  to  permit  the  unearned  premium  liability 
to  be  abated  by  re-insurance  in  companies  that 
have  never  reported  to  our  authorities,  nor  been 
examined  by  them,  and  whose  solvency  therefore 
is  conjectural. 

The  assets  of  an  insurance  company  admitted  to 
do  business  in  any  of  our  States  must  be  described 
definitely  and  have  a  value  that  can  be  ascertained 
conveniently  upon  due  inspection.  Corner  lots  in 
the  planet  Jupiter,  or  Klondike  mining  stock, 
would  not  be  accepted  as  assets  because  their  values 
would  not  be  easily  verifiable.  Any  company  that 
should  ask  to  do  business  in  a  State  without  sub- 
mitting a  financial  statement  would  receive  a 
prompt  refusal.  It  would  appear,  therefore,  that 
a  company  should  not  be  suffered  to  do  indirectly 
that  which  it  cannot  do  directly.  If  it  cannot  with- 
out examination  be  permitted  to  assume  liabilities 
in  any  State,  it  should  not  be  permitted  without 
examination  to  offset  the  liabilities  of  other 
companies  in  that  State.  A  re-insurance  credit 
fter  all  is  in  essence  like  any  other  asset,  and  it 
hould  be  approved  only,  if  at  all,  when  that  which 
supports  it  is  within  reach  for  examination. 


619 

UNEARNED    PREMIUMS    ARE  NOT   REALIZED   PROFIT. 

The  habit  of  many  non-professional  writers  on 
insurance  of  ignoring  the  unearned  premium  lia- 
bility is  a  source  of  annoyance  to  underwriters. 
Recently  a  Western  editor  less  widely  known  as  a 
thinker  than  as  a  writer  has  denounced  the  insur- 
ance companies  because  of  what  he  calls  their  ex- 
tortionate rates.  Under  his  method,  all  premiums 
are  fully  earned  on  payment  and  no  offset  is 
allowed  for  future  obligations. 

We  are  moved  to  remind  such  critics  that  people 
do  not  buy  policies  for  their  scrap-books.  When 
paying  the  premium  they  expect,  should  a  fire  loss 
occur,  that  the  company  might  be  willing  to  do 
something.  They  are  of  a  numerous  class  whose 
combined  expectations  are  based  upon  a  contingent 
liability  of  more  than  $18,000,000,000  assumed  by 
the  underwriters,  a  sum  which  though  represent- 
able  in  figures  is  too  vast  to  be  comprehended  by 
the  mind.  The  unearned  premium  on  this  sum, 
deposited  with  the  underwriter  is  over  one  hundred 
million  dollars.  It  is  his,  when  he  earns  it.  It 
does  not  represent  what  he  owns  but  what  he  owes, 
and  long  before  it  becomes  his  property  he  will 
have  paid  on  account  of  it  many  millions  of  dollars 
of  fire  loss  and  expense.  A  premium  unearned, 
therefore,  is  not  the  same  as  a  profit  realized. 


620 

CLERICAL   LABOR    AND   DETAIL. 

Commenting  on  the  particular  system  pursued  at 
fclie  home  office  of  the  company  with  which  I  am 
connected,  Mr.  Henry  Ward,  who  has  in  charge 
the  unearned  premium  accounts  of  the  company 
writes  as  follows  : 

**To  accurately  keep  a  record  of  the  Re-Insur- 
''  ance  Reserve,  and  the  amount  at  risk  under  the 
**  present  form  of  computation,  requires  an  amount 
**  of  detail  work  that  to  an  outsider  is  incomprehen- 
**  sible  and  may  appear  unnecessary  ;  but  while  it  is 
*'  possible  that  some  companies  may  have  a  shorter 
**  way  of  arriving  at  the  result,  it  is  impossible  for 
^*any  company  to  have  a  system  more  accurate. 
'*For  instance,  for  each  of  our  Departments  we 
*'  have  a  set  of  four  books. 

.   *'  One  for  amount  and  premium  written  ; 
*'  One  for  amount  and  premium  re-insured  ; 
*'One  for  amount  and  premium  cancelled. 

*'  Each  of  these  books  is  printed  and  arranged 
'*  for  say  ten  years,  the  years  along  the  top  of  the 
**  pages,  and  cut  down  the  sides  for  the  months, 
**each  month  being  separately  indexed  at  the  top 
''to  represent  five  years,  and  the  total  figures  of 
''each  of  above  three  classes  every  month  are 
"segregated  into  the  months  and  years  of  expira- 
"  tion  of  business  and  posted  into  their  re  spective 
**  months. 


6^^1 

"This  segregation  alone  entails  considerable 
"labor,  for  premiums  written  in  say  September, 
"1898,  while  largely  expiring  in  September  1899 
"and  1901,  might  have  some  portion  expiring  in 
"  any  of  the  sixty  months  between-September  1898 
"and  September  1908. 

"  The  cancellations  have  all  to  be  marked  off  and 
"  the  amount  of  original  premiums  received  on  such 
"  cancellations  segregated  and  posted  in  the  various 
"months  in  which  such  cancelled  business  would 
' '  have  expired  if  run  to  expiration.  (If  we  segrega- 
"  ted  the  return  premiums  paid  we  should  unneces- 
"  sarily  be  carrying  until  expiration  the  difference 
"  between  original  and  return  premium,  and  cor- 
"  respondingly  increasing  our  reserve.) 

"  The  fourth  book  is  to  show  the  amount  in  force 
"  and  the  premiums  thereon,  and  is  the  proof  of  all 
"the  preceding  posting.  January,  for  example,  is 
"  the  total  of  all  the  business  on  the  books  of 
"January  1898,  1899,  1900,  1901  and  1902,  and  so 
"  on  with  each  month. 

"To  arrive  at  the  reinsurance  reserve,  we  have 
'  to  further  segregate  the  net  business  so  posted 
"to  find  out  the  pro  rata  as  called  for  by  present 
"  system,  which  is :  On  all  business  written  for 
"  one  year  or  less  at  risk  at  the  end  of  any  year 
**60^,  on  the  assumption  that  a  company  doing  a 
"  regular  business  has  an  equal  number  of  policies 


622 

**  having  only  one  day  to  run  to  expiration  as  it 
*'has  policies  that  have  only  run  one  day. 

'*  This  system  is  carried  out  on  two-year  business 
''on  the  same  equation  of  time,  ^.  e.,  if  written 
''  this  year,  at  the  end  of  the  year  it  would  be  as  6 
''months  is  to  24,  one  fourth,  f  reserved,  and  at 
"the  end  of  two  years,  as  18  months  is  to  24,  J  re- 
"  served. 

"In  like  manner  at  the  end  of  the  first  year  of  a 
"  three-year  policy,  5/6  reserved ;  second  year,  1/2  ; 
"third  year,  1/6. 

"  At  the  end  of  first  year  of  a  four-year  policy 
"there  must  be  7/8  reserved  ;  at  the  end  of  second 
"year,  5/8  reserved  ;  at  the  end  of  third  year,  3/8 
"  reserved  ;  at  end  of  fourth  year,  1/8  reserved. 

"At  the  end  of  first  year  of  a  five-year  policy 
"there  must  be  9/10  reserved;  at  end  of  second 
"year,  7/10  ;  at  end  of  third  year,  1/2 ;  at  end  of 
"fourth  year,  3/10  reserved  ;  at  end  of  ^ve  years 
'^1/10  reserved." 

In  addition  to  the  facts  noted  in  the  intelligent 
description  given  by  Mr.  Ward,  I  may  say  that 
extensions  and  reductions  in  the  original  term 
must  be  recorded,  and,  indeed,  all  endorsements 
observed  for  their  effect,  if  any,  on  these  accounts. 

Were  each  of  our  States  to  require  a  special  re- 
port of  the  exact  status  of  the  unearned  premiums 
on  risks  within  its  own  borders,  the  books  now  re- 


623 

quired  would  need  to  be  multiplied  many  times. 
I  am  sure  that  I  voice  the  wish  of  every  under- 
writer in  the  country  in  expressing  my  own,  that  so 
enormous  an  expense  be  not  added  to  the  clerical 
work  of  the  business,  an  expense  yielding  no  results 
that  would  excite  more  than  a  passing  interest. 

I  have  referred  to  the  inaccuracy  of  the  present 
method  of  computing  the  unearned  premium  re- 
serve. It  is  so  especially  as  to  the  reserve  for  an- 
nual premium.  In  the  case  of  the  three-  and  five- 
year  risks  so  large  a  percentage  of  the  premium 
lies  beyond  the  year  of  the  writing  that,  being 
computed  with  reference  to  the  whole  term,  the 
variation  in  the  reserve  is  not  so  serious. 

Perhaps  the  most  accurate  method  of  computing 
the  reserve  would  be  by  an  equation  of  months  ; 
the  next  nearest  approach  to  accuracy  would  be  by 
an  equation  of  quarters  of  years.  Lastly,  the  present 
method  which  when  honestly  followed  is  satisfac- 
tory in  nearly  all  cases.  When  a  company  is  be- 
ginning business,  or  is  rapidly  increasing  its  pre- 
miums because  of  an  extension  of  its  territory,  or 
other  cause,  the  monthly  equation  will  yield  a  little 
larger  reserve,  especially  as  to  the  one-year  risks. 

The  following  tables  will  serve  to  illustrate  the 
results  reached  by  the  system  recommended  in 
such  exceptional  cases  as  against  the  current  treat- 
ment of  all  annual  risks  as  half  earned  : 


624 


We  will  take  the  case  of  a  company  beginning 
January  1,  1898,  and  developing  its  interests  with 
due  energy  throughout  the  year.  We  will  assume 
that  its  annual  and  term  risks  correspond  in  their 
proportions  with  those  of  the  aggregate  of  compan- 
ies shown  elsewhere  herein.  The  premium  receipts 
then  will  be  shown  in  Table  A  : 

TABLE  A. 


MONTHLY 

ONE 

TWO 

THREE 

FOUR 

FIVE 

PKBMIUM  KECEIPT8. 

YEAB. 

YEARB. 

YEARS. 

YEARB. 

YEARS. 

January 

$10,000 

$4,268 

$86 

$4,021 

$87 

$1,538 

February 

12,000 

5,122 

105 

4,825 

105 

1,843 

March 

13,000 

5,547 

113 

5,227 

114 

1,999 

April 

14,000 

5,975 

121 

5,629 

122 

2,153 

May 

14.000 

5,975 

121 

5,629 

122 

2,153 

June 

15,000 

6,402 

129 

6,031 

131 

2,307 

July 

17,000 

7,255 

146 

6,836 

148 

2,615 

August 

19,000 

8,109 

164 

7,640 

165 

2,922 

September 

30,000 

8,536 

172 

8.042 

174 

3,076 

October 

21,000 

8,962 

181 

8,444 

183 

3,230 

November 

22,000 

9,389 

190 

8,846 

191 

3,384 

December 

23,000 

9,815 

199 

9,248 

200 

3,538 

$200,000 

$85,355 

$1,727 

$80,418 

$1,742 

$30,758 

Under  the  present  method  of  computing  reserves 
the  unearned  premium  would  be  as  follows  : 


$85,355 

Annual          Reserve, 

50^ 

$42,678 

1,727 

Two  Year 

75^ 

1,295 

80,418 

Three  Year 

83i^ 

67,015 

1,742 

Four  Year 

s^% 

1,524 

80,758 

Five  Year 

90% 

27,683 

$200,000  Say  lOi  average,    $140,205 

If  now  the  unearned  premiums  of  this  business 
were  computed  by  months  as  indicated  in  the  tables 


626 

(hereafter  given)    for  one— two— three — four  and 
^ve  year  risks — the  results  would  be  as  shown  in 

TABLE  B. 


1898  PREMIUMS. 

ANNUAL 

UN- 
EARNED. 

TWO 
YEAR 

THREE 
YEAR 

FOUR 
YEAR 

FIVE 
YEAR 

TOTAL 

Jan'y      $10,000 
Feb'y        12,000 
March       13,000 
April        14,000 
May         14,000 
June         15,000 
July         17,000 
August     19,000 
Sept.         20,000 
Oct.          21,000 
Nov.         22,000 
Dec.          23,000 

$177 

640 
1,255 
1,741 
2,240 
2,933 
3,980 
5,068 
6,046 
7,094 
8,216 
9,406 

$45 

69 

68 

78 

83 

94 

112 

133 

147 

162 

178 

195 

$2,736 

3,417 
3,842 
4,298 
4,448 
4,941 
5,795 
6,684 
7,260 
7,855 
8,476 
9,119 

$65 

82 
97 
100 
108 
113 
131 
149 
161 
173 
186 
197 

$1,241 

1,520 
1,688 
1,848 
1,885 
2,054 
2,376 
2,702 
2,898 
3,093 
3,299 
8,510 

$4,264 

5,718 

6,945 

8,065 

8,759 

10,185 

12,844 

14,736 

16,512 

18,377 

20,355 

22,427 

$200,000 

$48,746 

$1,854 

$68,871 

$1,557 

$28,109 

$148,687 

showing  a  liability  larger  by  $8,432  (or  say  Q% 
more)  than  that  charged  under  present  rules. 

If  the  unearned  premium  in  the  supposed  case 
had  been  computed  by  quarter  years  it  would  have 
been  $147,889.  If  by  half  years  it  would  have  been 
$146,762.  Recapitulating  the  various  methods  of 
computation  we  have  as  follows  : 


Annual  Prems. 
Two  Year 
Three  Year 
Four  Year 
Five  Year 


$85,355 
1.727 

80.418 
1,742 

30,758 


200,000 


RESERVE 
PRESENT 
METHOD 

$42,678 
1,295 

67,015 
1,524 

27,683 

$140,195 


IP    COM- 
PUTED BY 
MONTHS 


$48,746 
1,354 

68,871 
1,557 

28.109 


$148,637 


BY 
QUARTERS 


$48,127 

1,363 

68,763 

1,551 

28,085 


$147,889 


HALF 
YEARS 


$47,371 

1,831 

68,489 

1.547 

28.024 


$146,762 


626 

The  following  Tables  C  to  Gr  inclusive  may  be 
useful  in  equating  the  unearned  premiums  of 
annual  and  term  risks  by  months,  quarters  and 
half  years. 

TABLE  C. 

One  Year  Risks. 

Unexpired  Term  op  Risks  Written  During  1898. 

On  January  1,  1899. 


month 

WRITTEN. 


Jan'y    1898 
Feb'y 
March      " 

April  '  • 
May  " 
June         " 

July 

August  '* 
Sept. 

Oct. 

Nov. 

Dec. 


EACH    MONTH 
EQUATED  %.    UN- 
EXPIRED TERM . 


JAN'Y  1.  1899. 


%  month 
1J-/|  months 
2H        " 


7^ 


iiK 


EQUATED  BY  QUARTERS. 
UNEXPIRED  TERM. 


JAN'Y    1,    1899. 


EQUATED  BY 

THE  HALF  YEAR. 

UNEXPIRED 

TERM. 

JAN'Y  1,1899. 


First  quarter 
averatre    unexpired 
13^  months 


Second  quarter 
average    unexpired 
43^  months 

Third  quarter 
average    unexpired 
1^  months 

Fourth    quarter 
average  unexpired 
10>^  months 


3  months 


9  months 


627 

TABLE  D. 
Two   Year    Risks. 


Jan'y     1898 

Feb'y 

March 

April 

May 

JuDe 

July 

August 
Sept. 

Oct. 

Nov. 
Dec. 


12^2  nionths 

14^  •• 

15K  " 

17H  " 

18K  " 

20K  " 

21K  •' 

22^  " 

23K  " 


First  quarter 
average  unexpired 
131^  months 

Second    quarter 
average  unexpired 
163^  months 

Third  quarter 
average  unexpired 
19)^  months 

Fourth  quarter 
average  unexpired 
223^  months 


15  months  or 


21  months 


or  ^  of  term 


TABLE  E 

Three  Year  Risks. 

Unexpired  Term  of  (Three  Year)  Risks  Written  During  1898. 

On  January  1,  1899. 


MONTH 

written 


unexpired  term 
equated  by 

MONTHS. 


Jan'y  1,  1899. 


UNEXPIRED  TERM 

EQUATED  BY  Q'r'S   OF 

YEAR 


Jan'y  1,  1899. 


UNEXPIRED 

TERM   EQUATED 

BY  THE  HALF 

TEAR. 


Jan'y  1, 


Jan'y     1898 

Feb'y 

March 

April 

May 

June 

July 

August 

Sept. 

Oct. 
Nov. 
Dec. 


241^  Mouths 

26^  " 

27^  " 

283^  " 

29>^  " 

30K  " 
311^ 

32J^  " 

331^  " 

d5}4  " 


First  quarter  1 

average  unexpired  >■ 
253^  months  ) 

Second  quarter  ) 
average  unexpired  > 
28^  months  ) 

Third  quarter  ) 

average  unexpired  v 
313^  months  ) 

Fourth  quarter  ) 
average  unexpired  >• 
343^  months  ) 


27  months 

or  9/12  of 

term 


33  months 
or  11/12  of 
whole  term 


628 

TABLE   F. 
FouK  Year  Risks. 


Jan'y,    1898 
Feb'y 
March      '* 

April        *• 
May 
June        " 

July 
Aug. 
Sept 

Oct. 

Nov.         " 
Dec. 


363^  months 


89^ 

41K 

42^ 

43K 
44K 

45K 
46>^ 

47K 


::    t 


ii    I 


First  quarter  ) 

average    unexpired  [• 
373^  months  ) 

Second   quarter 
average  unexpired 
403^  months 

Third  quarter 
average  unexpired 
433^  months 

Fourth  quarter 
average  unexpired 
463^  months 


39  months  or 

15/16ths  of 

term 


45  months  or 

15/16  of 

term 


TABLE    G. 

Five  Year  Risks. 

Unexpired  Term  of  (Five  Year)  Risks  Written  During  1898. 

On  January  1,  1899. 


MONTH 
WRITTEN 


Jan'y     II 
Feb'y 


March 
April 
May 
June 


July 

Aug. 

Sept. 

Oct. 

Nov. 


Dec. 


UNEXPIRED  TERM 

EQUATED    BY 

MONTHS. 


Jan'y  1,  1899. 


483^ 
49K 


501^ 
51^ 
52K 
53H 

54^ 
55^ 

573^ 
68>i 


69^ 


UNEXPIRED  TERM  EQUA 
TED  BY  QRS.  of  YEARS. 


Jan'y   1,  1899. 


First  Quarter  ) 

Average  unexpired  [• 
493^  months  ) 


Second  Quarter  J 
Average  unexpired  V 
523^  months  ) 


Third  Quarter  ) 

Average  unexpired  >• 
553>^  months  ) 

Fourth  Quarter  1 
Average  unexpired  [• 
683^  months.  ) 


UNEXPIRED 

TERM    EQUATED 

BY     THE      HALF 

TEAR 


Jan'y  1, 


51  months  or 

17/20th8     of 

term 


57  months  or 
19/20th8  of 
term 


629 

Permit  me,  in  conclusion,  to  recommend  that  this 
honorable  body  appoint  of  its  members  a  commit- 
tee to  draft  a  statute  defining  the  unearned  pre- 
mium reserve,  and  the  method  of  its  ascertainment. 
For  this  debit  is  uniformly  misnamed  where  men- 
tioned. Some  States  do  not  mention  it  at  all.  No 
two  States  have  the  same  law  concerning  it.  Sev- 
eral States  treat  three  and  five-year  risks  as  half- 
earned  at  the  end  of  the  first  season.  Under  insur- 
ance advertising  laws,  it  is  criminal  to  advertise  in 
one  State  a  reserve  approved  in  another.  Surely, 
therefore,  it  is  time  that  such  an  influential  body 
as  this  should  draft  a  wise  and  comprehensive  stat- 
ute governing  this  liability^  and  labor  earnestly  to 
make  it  uniform  law. 

It  only  remains  to  thank  you  for  this  opportun- 
ity to  address  you.  No  association  better  than 
this  represents  the  higher  elements  of  American 
character.  Clothed  with  a  discretionary  power 
that  might  be  used  as  the  implement  of  irremedi- 
able oppression,  the  insurance  officials  of  the  sev- 
eral States,  as  a  class,  have  discharged  their  duties 
with  equity.  The  underwriter  who  is  a  student  of 
your  Annual  Reports  knows  that  insurance  offi- 
cials have  almost  uniformly  opposed  unjust  legisla- 
tion, and  the  public  may  learn  from  these  reports 
that  you  wage  relentless  war  against  illegitimate 
schemes.     The  Insurance  Commissioner  of  Wiscon- 


630 

sin,  whose  ability  we  all  recognize,  and  whose 
graceful  courtesy  this  occasion  has  witnessed, 
states  in  his  last  official  report  that  not  a  single 
company  licensed  by  him  during  the  years  of  his 
administration  has  failed.  This  is  efficient  work. 
Naturally  in  time,  gentlemen  of  the  association, 
you  may  be  reached,  one  by  one,  by  the  mutations 
of  political  fortune.  Should  national  supervision 
be  an  unrealizable  dream  and  that  by  the  State  con- 
tinue, may  those  who  succeed  to  your  positions 
emulate  the  standard  you  have  established  and  in 
wisdom,  integrity  and  power,  guard  well  the  inter- 
ests committed  to  their  care. 


F.  C.  MOORE  : 

This  question  is  one  which  must  be  decided  from 
the  viewpoint  of  the  purpose  for  which  the  reserve 
is  to  be  computed,  and  this  purpose  must  be  stated 
as  a  premise.  If  it  be  for  making  a  financial  state- 
ment of  exhibit  of  the  company's  condition,  show- 
ing its  assets  and  liabilities,  there  can  be  no  doubt 
that  the  reserve  should  be  computed  on  the  basis* 
of  what  the  company  owes  its  policy-holders,  and 
that  the  company  should  have  in  hand  at  all  times 
that  pro  rata  portion  of  each  premium  which  cor- 


631 

responds  with  the  unexpired  time  of  the  policy, 
whether  the  rate  be  sufficient  to  carry  the  risk  or 
not.  An  obtained  rate  of  two  per  cent,  on  a  frame, 
steam-power  planing-mill  worth  ten  per  cent,  may 
be  grossly  inadequate  for  the  purpose  of  insuring 
the  class,  but  if  that  be  the  rate  of  the  policy,  one 
per  cent,  would  be  all  that  the  company  would 
owe  the  policy-holder  at  the  end  of  six  months  if  it 
should  then  elect  to  cancel. 

In  the  absence  of  any  stipulation  in  the  policy 
that  the  assured  shall  have  the  right  at  any 
time  to  demand  its  cancellation  and  a  return  of 
premium  on  the  agreed  basis,  and  providing  also 
that  the  company  or  a  receiver  may  cancel  at  any 
time  and  tender  the  ^ro  rata  unearned  premium, 
there  would  clearly  be  no  right  whatever  to  cancel. 
The  right  does  not  exist  at  law  ;  it  is  a  stipulation  of 
the  contract  and  grows  out  of  the  contractural  re- 
lation of  the  two  parties  and  not  out  of  their 
statutory  or  common  law  rights.  This  being  the 
fact,  reference  must  be  had  to  the  contract  itself, 
which  alone  provides  for  a  return  of  premium. 
And  here  there  can  be  no  question  as  to  the  liabil- 
ity of  the  company.  The  policy  expressly  states 
that  the  company  must  return  the  pro  rata  un- 
earned premium  if  it  elects  to  cancel.  Therefore, 
in  case  of  insolvency  a  receiver  must  return  the 
premium  on  this  basis. 


682 

Clearly,  then,  so  far  as  a  State  insurance  depart- 
ment is  concerned,  there  can  be  no  other  basis  for 
computing  the  reserve.  An  insurance  department 
aims,  by  its  annual  statement  queries,  to  ascertain 
the  financial  condition  of  the  companies  reporting 
to  it,  publishing  an  official  statement  of  their  assets 
and  liabilities.  On  no  other  basis  could  an  Insur- 
ance Department  official  discharge  the  duties  of 
guardian  or  trustee  of  public  interests,  because  it 
would  be  physically  impossible  for  him,  even  if 
qualified  as  an  expert,  to  pass  upon  the  sufficiency 
of  the  rate  of  each  individual  risk  in  force. 

And  this  brings  us  to  the  second  proposition : 

Should  a  company  be  required  to  reserve  a  suffi- 
cient amount  of  premium  to  carry  each  risk  to  its 
termination,  paying  the  losses  and  expenses  ? 

The  answer  to  this  question  necessarily  involves 
the  determination  of  another,  viz.:  Is  it  possible 
for  an  Insurance  Department,  by  expert  examina- 
tion, to  test  the  sufficiency  of  a  company's  reserve 
based  upon  the  adequacy  of  rate  for  eaclj  risk  in 
force  ? 

I  claim  that  it  would  be  physically  impossible, 
even  if  the  department  were  possessed  of  experts 
whose  opinions  would  be  rate  standards,  to  ex- 
amine the  business  of  any  large  agency  company 
before  the  policies  under  examination  would  have 
expired.     Experts  who  are  competent  judges  of 


633 

haeards  are  few  in  number  and  hard  to  find.  In 
fact,  no  one  man  can  be  a  competent  expert  or 
judge  as  to  all  classes  of  risks,  and  those  who  are 
most  experienced  must  form  their  opinions  by- 
careful  study  of  all  the  facts  of  each  case,  by- 
reference  to  insurance  maps,  examination  of  in- 
spectors' reports,  &c.,  &c.  Moreover,  in  the  ab- 
sence of  systematic  rating  like  that  by  schedules, 
based  upon  statistical  experience  of  companies,  ex- 
perts, like  all  other  doctors,  disagree,  and  con- 
viction either  of  poor  judgment  or  of  reckless  un- 
derwriting would  be  impossible  if  a  trial  in  a  court 
of  law  should  be  had  upon  expert  testimony. 

To  demonstrate  the  impossibility  of  an  official 
test  of  a  company's  business  on  this  basis  let  us 
take  the  process  of  deciding  upon  the  adequacy  or 
inadequacy  of  a  rate  in  any  well  managed  insurance 
company.  In  the  first  place,  the  local  agent  of  the 
company  in  the  town  in  which  the  risk  is  located  is 
selected  with  reference  to  his  judgment  and  ability 
and  his  local  knowledge  of  buildings,  merchandise 
and  their  owners.  When  he  decides  to  accept  a 
risk  he  makes  a  full  report  to  the  company.  The 
examiner  in  the  office  of  the  company  consults 
whatever  records  the  company  may  have  (and  they 
are  often  voluminous)  of  the  particular  risk  in  ques- 
tion ;  the  town  and  its  fire  department ;  the  insu- 
rance map    showing   exposures  ;    the    mercantile 


634 

agency  report,  often  making  a  special  mercantile 
agency  inquiry  ;  finally  passing  the  report  of  the 
risk  to  the  files  of  the  company.  The  risk  is  after- 
wards, in  addition,  generally  inspected  by  an  ex- 
pert special  agent  or  surveyor  on  the  ground. 

But  this  is  not  all.  The  risk  may  change,  or  the 
exposures  may  change.  Clearly,  to  examine  the 
risks  of  any  one  company  would  require  at  least  as 
many  men,  working  continuously,  as  were  required 
by  the  company  for  its  own  purposes.  They  would 
need  to  be  fully  as  expert ;  indeed,  they  ought  to 
be  better  judges  of  hazards  than  the  company's  own 
men  ;  and,  inasmuch  as  every  company  has  term 
business  on  its  books,  some  policies  running  for  five 
years,  it  would  require  more  than  a  year  to  examine 
the  business  of  any  one  company  in  order  to  deter- 
mine the  sufficiency  or  insufiiciency  of  rate.  By  the 
time  the  examination  could  be  completed  the  an- 
nual policies  would  nearly  if  not  entirely  have  ex- 
pired and  the  company  would  have  made  a  profit 
or,  perhaps,  passed  into  bankruptcy. 

Clearly,  no  department  could  examine  all  com- 
panies.  This  being  the  case,  a  law  requiring  a  re- 
serve based  upon  a  sufficiency  of  rate  and  the  exer- 
cise of  expert  judgment  would  simply  bear  heavily 
upon  those  conscientious  underwriters  who  would 
aim  to  observe  the  law  and  be  utterly  ignored  by 
the  very  companies  who  most  need  supervision.     In 


635 

other  words,  a  law  wMcli  cannot  be  enforced  ham- 
pers the  honest  citizen  and  favors  the  dishonest  and 
tricky.  Such  laws  should  never  be  enacted.  To 
put  a  law  upon  the  statute  books  which  cannot  be 
enforced  would  be  a  wrong  upon  all  honest  under- 
writers. 

It  is  sometimes  necessary  for  companies,  fully  in- 
formed as  to  what  rates  should  be,  to  accept  risks 
below  the  cost  of  carrying  them,  in  order  to  meet 
competition  forced  upon  them  by  State  laws  enacted 
to  satisfy  popular  but  mistaken  views  as  to  tariffs. 
The  most  conservative  companies  are  at  times  com- 
pelled to  do  this  in  order  to  preserve  their  business. 
To  require  them  under  such  circumstances  to  re- 
serve a  rate  which  in  their  judgment  would  be  suf- 
ficient to  carry  the  risk — a  requirement  which  they 
would  conscientiously  respect — would  be  to  put 
them  at  a  serious  disadvantage  with  unscrupulous 
competitors,  who  would  reserve  an  insufficient 
amount,  knowing  that  no  State  department  could 
investigate  and  detect  their  crime  or  punish 
them. 

It  may  safely  be  stated  that  a  law  which  depends 
for  its  enforcement  upon  the  willing  observance  of 
conscientious  men  simply  places  them  at  the  mercy 
of  those  with  whom  conscience  is  a  missing  quantity 
and  an  absent  factor.  It  imposes  a  penalty  upon 
crimes  which  cannot  be  detected,  and  is,  therefore. 


636 

a  burden  upon  him  who  is  conscientious  and  an  op- 
portunity to  him  who  is  not. 

Popular  Tests  of  Adequacy  of  Rate. — It  has  been 
suggested  that  the  average  rate  of  a  company- 
would  indicate  the  sufficiency  or  insufficiency  of 
its  reserve,  and  that  the  average  percentage  of  loss 
to  premium  would  indicate  the  adequacy  or  inad- 
equacy of  rate  obtained  and  the  sufficiency  of  the 
unearned  premium  reserve.  Such  suggestions  over 
look  important  facts.  A  company  having  the 
worst  class  of  risks,  and,  therefore,  the  highest 
rated  ones  would,  on  this  basis,  show  the  largest 
unearned  premium  reserve  in  proportion  to  amount 
at  risk,  because  it  would  show  a  high  average  rate 
of  premium  obtained.  A  company,  for  example, 
doing  a  large  amount  of  long  term  farm  business, 
although  taken  at  inadequate  rates,  would  show 
well  in  such  a  table.  It  might  have  unprofitable 
farm  business  in  Missouri,  sections  of  Indiana, 
Sullivan  County,  l^ew  York,  or  Southern  Illinois, 
and  show  a  higher  average  rate  obtained  than  a 
company  doing  a  more  profitable  and  well  selected 
business.  As  a  rule,  it  will  be  observed  that  the 
companies  whose  average  rate  of  premium  is  low- 
est, indicating  the  best  class  of  risks,  are  among 
the  most  successful. 

Re-insurance  Fund. — This  term  applied  to  the 
reserve  for  unearned  premiums  is  a  misnomer, 


637 

growing  out  of  a  misconception  of  its  purpose. 
It  is  claimed  by  some  that  a  company  ought  only 
to  be  required  to  have  in  hand  a  sufficient  sum  to 
re-insure  all  of  its  risks  with  a  reliable  company, 
and  that  this  sum  would  be  materially  less,  by  at 
least  the  expense  of  securing  the  business,  than 
l;he  pro  rata  unearned  portion  of  the  premiums  on 
running  policies.  This  theory  overlooks  the  fact, 
which  should  always  be  kept  in  mind,  that  the 
measure  of  reserve  is,  and  must  always  be,  the  lia- 
bility to  the  policy-holders  under  their  contracts. 
After  the  large  Chicago  and  Boston  fires,  it  will  be 
remembered,  there  were  few  companies  doing  bus- 
iness in  the  United  States  in  condition  financially 
to  assume  the  liabilities  of  any  other  company ; 
each  had  all  it  could  do  to  take  care  of  its  own 
risks  and  carry  its  unburned  policy-holders  to  the 
expiration  of  their  contracts.  To  make  the  meas- 
ure of  sufficiency  that  amount  which  some  un- 
known, hypothetical  company  might  be  willing  to 
accept  for  carrying  the  risks  for  the  unexpired 
terms,  forgetting  that  the  emergency  which  would 
make  re-insurance  necessary  might  find  all  other 
companies  in  the  condition  which  followed  the 
Chicago  fire,  would  be  as  indefinite  as  the  cele- 
brated boundary  line  suggested  by  Rufus  Choate 
— *'  from  the  tail  of  a  jay  bird  to  a  hive  of  bees  in 
full  swarm." 


THE   FOREIGN   FIRE  INSURANCE  COM- 
PANY AND  ITS  BUSINESS  METHODS. 

E.  F.  BEDDALL: 

INTEODUCTION. 

ON  the  second  day  of  September,  1666,  occurred 
what  is  now  known  as  the  ''  Great  Fire  of 
London,"  an  incident  in  history  which,  if  it  did 
not  suggest,  at  least  led  to  the  development  of  the 
idea  of  fire  insurance,  for,  while  individual  under- 
writing, we  are  told,  had  previously  been  practiced 
in  Europe  to  some  extent,  the  origin  of  fire  insur- 
ance as  a  business  may  be  fairly  ascribed  to  that 
important  event  and  the  dire  results  which  followed 
it. 

The  first  fire  insurance  company  of  which  we 
have  any  record  was  organized  in  the  city  of  Lon- 
don in  the  year  1682,  and  was  designated  "The 
Fire  Insurance  Office  for  Houses,  etc.,"  which  name 


639 

was  subsequently  changed  to  that  of  the  **  Phoenix," 
because  of  its  badge — the  Phoenix  in  flames — which 
appeared  over  the  entrance  to  the  office.  This  com- 
pany was  supplemented  in  due  time  by  other  com- 
petitors for  popular  favor,  each  claiming  to  offer 
advantages  to  intending  insurers  which  the  others 
did  not^possess,  some  urging  the  greater  security 
offered  by  their  policy  contracts  and  others  the 
lower  price  at  which  their  contracts  could  be  se- 
cured. From  this  beginning  may  be  traced  the 
extension  of  the  business  of  fire  insurance  to  all 
quarters  of  the  globe,  until  to-day  there  is  hardly 
a  remote  nook  in  which  an  agency  of  some  company 
is  not  found. 

It  is  not  my  purpose  in  this  paper  to  give  a  his- 
tory of  fire  insurance,  nor  to  trace  the  various 
changes  in  the  methods  by  which  it  is  conducted 
and  which  time  has  brought  about,  but  rather  to 
present  in  as  concise  a  form  as  possible  the  present 
manner  of  carrying  on  the  business  throughout  the 
world  which  the  experience  of  upwards  of  200 
years  has  developed.  To  do  this  I  purpose  taking 
up  the  prominent  nations  separately,  reciting  the 
more  important  laws  and  the  rules  and  regulations 
which  govern  the  companies  in  the  conduct  of  their 
business,  and  thereafter  to  comment  briefly  upon 
such  differences  in  law  and  practice  as  the  result  of 
my  investigations  may  have  disclosed. 


640 
AUSTRIA-HUNGARY. 

AUSTRIA. 

A  Government  concession  is  requisite  for  the  es- 
tablishment of  an  insurance  company  in  Austria, 
and  certain  provisions  of  the  federal  law,  the  com- 
mercial code  and  the  rulings  of  the  Insurance  De- 
partment govern  its  operations.  Stock  companies 
must  have  a  paid-in  capital  of  100,000  gulden 
(about  $40,000)  for  each  branch  of  insurance  con- 
ducted, but  the  minimum  paid-in  capital  must 
amount  to  at  least  300,000  gulden  (about  $120,000). 
Companies  are  required  to  furnish  to  the  depart- 
ment a  complete  list  of  their  stock  subscribers  with 
the  amount  of  stock  held  by  each  stockholder. 
Mutual  companies  are  required  to  have  a  founda- 
tion fund  for  such  an  amount  as  the  existing  con- 
ditions and  anticipated  volume  of  business  demand. 
Aside  from  a  re-insurance  fund,  a  guarantee  reserve 
is  required  to  be  formed  and  maintained  out  of  the 
surplus  earnings  for  a  sum  which  must  be  equal  in 
amount  to  the  original  foundation  fund  before  div- 
idends can  be  paid. 

The  by-laws  of  both  mutual  and  stock  companies 
must  conform  to  statutory  requirements,  must  de- 
scribe the  particular  branches  of  business  in  which 
they  are  engaged,  and  must  state  whether  the  bus- 
iness is  to  bQ  done  direct  or  by  way  of  re-insurance, 


641 

within  the  empire  or  abroad,  and  must  receive  gov- 
ernment approval  before  business  is  commenced. 
Every  alteration  or  amendment  of  the  by-laws  is 
subject  to  similar  approval  before  it  can  become 
operative.  Special  conditions  in  policy  forms  are 
permissible  in  domestic  transactions  only  when  the 
same  do  not  conflict  with  the  general  conditions, 
but  merely  supplement  them  or  make  them  more 
favorable  to  the  assured.  Policy  forms  and  aj>pli- 
cation  blanks  must  be  submitted  to  the  Minister  of 
the  Interior  for  his  approval.  Prospectuses,  circu- 
lars and  statements,  in  case  they  contain  statistical 
data  concerning  the  financial  standing  of  the  com- 
pany, must  receive  ofiicial  approval  before  they 
can  be  issued.  This  Minister  has  the  power  to  pro- 
hibit a  company  from  advertising  its  financial 
standing  and  likewise  to  require  the  making  of  a 
deposit  by  a  foreign  company  and  the  increase  of 
the  deposit  when  made  whenever  he  shall  deem  it 
necessary  for  the  security  of  its  policy-holders. 
Domestic  companies  are  required  under  the  law  to 
give  notice  of  the  extension  of  their  business  to 
foreign  countries  and  must  disclose  the  terms  upon 
which  admission  to  such  countries  has  been  se- 
cured. 

Newly  established  companies  are  permitted  to 
carry  in  their  accounts  the  expenses  of  organiza- 
tion as  an  asset  for  five  years,   but  same  must  be 


642 

liquidated  within  tliat  period.  Dividends  of  more 
than  five  per  cent,  upon  the  paid-in  capital  cannot 
be  declared  until  the  expenses  of  the  company's 
organization  have  been  fully  liquidated. 

Supervising  power  is  reserved  to  the  government 
by  the  statutes  touching  the  question  of  the  disso- 
lution of  a  company,  the  winding  up  of  its  business 
and  securing  the  performance  of  its  policy  con- 
tracts, [and  its  consent  is  necessary  for  the  transfer 
of  the  business  of  one  company  to  another  or  to  the 
entering  into  a  re-insurance  contract  of  all  its  busi- 
ness with  another  company.  Government  supervision 
extends  in  general  to  securing  the  exact  observance 
of  all  legal  and  statutory  requirements  as  well  as 
those  conditions  on  which  may  depend  the  due  ful- 
fillment of  the  obligations  of  the  company.  Grov- 
ernment  supervision,  therefore,  takes  cognizance  of 
the  re-insurance  reserve,  the  lawful  investment  of 
assets,  as  well  as  the  complete,  accurate  and  clear- 
est possible  presentation  of  every  item  of  the  finan- 
cial statement  and  balance  sheet.  The  re-insurance 
reserve  is  required  to  be  equal  to  the  pro  rata  pre- 
mium for  the  unexpired  time  of  each  policy,  less 
commission,  but  in  no  event  must  it  be  less  than 
forty  per  cent,  of  the  premiums  under  running  pol- 
icies. With  a  native  company,  the  investment  of 
funds  must  be  definitely  provided  for  in  its  by-laws, 
which  must  conform  to  certain  statutory  require- 


643 

ments.  In  general,  touching  the  investment  of 
funds,  consideration  is  required  to  be  given  to  those 
securities  which  can  be  immediately  realized.  The 
general  insurance  laws  specify  the  securities  which 
are  deemed  suitable  for  investing  the  re-insurance 
reserve  in,  which  are  declared  to  be  domestic  col- 
lateral securities,  government  loans,  productive 
real  estate,  if  it  be  not  encumbered  for  more  than 
one- third  of  its  purchase  price,  mortgages  of  the 
kind  in  which  wards'  and  orphans'  funds  may  be 
legally  invested,  saving  bank  deposits,  etc.  The 
annual  statement  must  be  presented  in  a  certain 
prescribed  form  showing  the  assets  and  liabilities 
in  detail  and  must  be  published  in  certain  specified 
journals.  The  capital  stock  of  the  company  which 
is  authorized,  but  has  not  been  subscribed  for,  must 
not  appear  in  the  statement.  The  assets  must  be  en- 
tered at  their  market  value  at  the  time  of  making  up 
the  statement.  Funds  to  cover  the  fluctuations  of 
investments  must  not  be  credited  except  for  the 
purposes  for  which  they  are  held,  without  the  ap- 
proval of  the  supervising  authority.  The  reserve 
for  losses,  and  special  reserves  as  provided  for  by 
the  decisions  of  the  directors  at  the  company's 
general  meetings  are  to  be  included  in  the  annual 
statement ;  the  names  of  debtors  and  creditors  are 
required  to  be  given,  and  under  the  head  of  "  debt- 
ors" may  only  appear  claims  resulting  from  the 


644 

legitimate  conduct  of  their  business.  Separate 
from  them  must  appear  claims  against  agents  and 
branch  offices. 

Foreign  companies  are  required  to  render  state- 
ments for  their  aggregate  and  for  their  Austrian 
business  separately,  which  must  include  a  specifi- 
cation of  such  securities  as  are  held  in  Austria  for 
the  special  protection  of  Austrian  insurers.  The  " 
supervising  officers  of  the  government  are  author- 
ized at  any  time  to  demand  such  explanations  of 
the  statements  rendered  as  they  may  call  for,  and 
are  likewise  empowered  to  make  an  inspection  of 
the  books  of  the  company  or  agency.  In  an  ex- 
amination of  the  business  of  foreign  companies  it 
is  provided  that  their  Austrian  business  shall  be 
treated  in  the  same  manner  precisely  as  that  of  the 
Austrian  companies. 

The  Minister  of  the  Interior  issues  periodically 
official  publications  showing  the  financial  condition 
of  the  insurance  companies  respectively  transacting 
business  in  the  empire.  All  insurance  agents  must 
receive  certificates  of  their  appointment  and  must 
exhibit  same  to  the  proper  government  officials 
on  demand. 

HUNGARY. 

In  Hungary,  up  to  the  present  time,  no  special 
license  is  required  for  the  formation  of  an  insur- 


646 

ance  company,  but  the  appropriate  provisions  of 
the  commercial  code  must  be  observed.  There  is, 
however,  now  under  consideration  a  bill  to  regulate 
insurance  companies,  according  to  which  such  com- 
panies are  required  to  conform  to  special  require- 
ments aside  from  the  conditions  laid  down  in  the 
commercial  code.  This  bill  provides  that  all  com- 
panies must  have  a  paid-up  insurance  fund  of 
300,000  gulden  for  each  branch,  and  must  set  aside 
at  least  10  per  cent,  of  the  annual  net  profits  for 
the  formation  of  a  surplus  reserve  fund.  Within 
four  months  after  the  close  of  the  fiscal  year  the 
minutes  of  the  general  meeting  and  the  annual 
statement  must  be  filed  with  the  government 
official.  Foreign  companies  are  required  to  invest 
their  re-insurance  reserve  on  Hungarian  business  in 
Hungary  and  keep  it  so  invested  during  the  time 
they  continue  to  transact  business  there,  and  until 
their  obligations  in  Hungary  are  completely  satis- 
fied. The  bill  provides  likewise  for  a  Government 
Insurance  Department,  which  will  issue  licenses 
and  will  have  control  and  supervision  of  insurance 
reserves,  annual  statements,  etc.  The  bill  further 
provides  that  directors  of  domestic  companies  and 
the  representatives  of  foreign  companies  also  shall 
be  liable  to  a  fine  of  from  100  to  5,000  gulden  for 
each  breach  of  the  law,  but  an  appeal  to  the  Minis- 
ter of  Commerce  is  permitted.     This  bill  still  lies 


646 

before  the  Legislature,  and  it  is  by  no  means  certain 
that  its  passage  will  be  secured  without  important 
amendment. 

There  are  nine  stock  and  seventeen  mutual  com- 
panies in  Austria-Hungary,  and,  in  addition,  there 
are  numerous  associations  engaged  in  the  manufac- 
ture of  sugar,  paper  and  mining,  the  members 
of  which  respectively  protect  their  interests  by  a 
system  of  mutual  insurance.  There  are  also  in 
Austria  local  or  district  fire  insurance  associations 
which  are  called  ''Bauerverein"  (Peasant 
Societies).  At  the  close  of  1893  there  were  296  of 
these  associations  in  Austria,  nineteen  of  which 
were  organized  during  the  years  1889-93.  Twenty- 
three  in  that  time  went  out  of  business.  The  re- 
maining mutual  institutions  are  strong  and  well 
managed.  The  domestic  companies  have  but  little 
foreign  competition.  In  Austria  only  three  foreign 
companies  are  operating.  In  Hungary  no  foreign 
company  transacts  business.  The  Austrian  Sugar 
Refineries  Association  has  been  successfully  man- 
aged. It  includes  236  sugar  refining  companies  of 
the  Austrian  Monarchy.  The  association  retains 
only  a  small  proportion  of  its  business  for  its  own 
account,  and  give  the  greater  part  of  it  by  way  of 
re-insurance  to  two  Austrian  companies.  The  as- 
sociations engaged  in  mining  and  paper  making 
distribute  their  entire  insurance  among  the  stock 


647 

companies,  acting  as  agents  only,  and  as  such  re- 
ceiving the  commissions. 

The  condition  of  the  fire  insurance  business  in 
Austria  is  not  particularly  encouraging,  nor  is  the 
field  at  all  inviting.  The  profit  is  small,  rates  of  pre- 
mium are  low,  and  losses,  especially  on  agricultural 
property,  are  numerous.  Conflagrations  in  country 
towns  and  villages,  resulting  from  thatched  or 
other  combustible  roofs  and  the  inadequate  means 
at  hand  for  fighting  fire,  are  not  infrequent,  espec- 
ially in  Galicia.  In  Hungary  conflagrations  have 
greatly  decreased  of  late,  in  consequence  of  the 
preventive  measures  adopted  by  the  local  authori- 
ties. The  insuring  of  manufacturing  risks,  aside 
from  those  written  by  the  nine  stock  fire  insurance 
companies,  is  controlled  chiefly  by  fifteen  mutual 
companies.  Under  agreement  with  the  stock  com- 
panies these  mutual  companies  are  required  to 
cede,  by  way  of  re-insurance,  one-fifteenth  part  of 
each  and  every  risk  taken  to  each  of  the  nine 
stock  companies,  they  being  at  liberty  to  retain 
the  remaining  six-fifteenths  for  themselves,  or  dis- 
pose of  it  in  any  other  way  they  please. 

The  Austrian  companies  have  a  Tariff  Associa- 
tion, known  as  the  "Concordat,"  which  has  ex- 
isted uninterruptedly  for  more  than  thirty  years. 
To  this  association  belong  the  most  important 
Austrian  and  Hungarian  stock  fire  insurance  com- 


648 

panies,  as  well  as  such  foreign  companies  as  are 
transacting  business  there.  The  stock  and  mutual 
companies,  as  well  as  the  large  beet  sugar  and 
other  unions,  charge  substantially  identical  rates 
of  premium.  Certain  of  the  companies  issue  poli- 
cies of  insurance  for  a  period  of  years,  taking  notes 
in  part  payment  thereof.  Others  issue  policies  for 
a  specified  number  of  years,  but  which  provide  for 
an  annual  payment  of  the  premium,  a  reduction 
being  made  proportionate  to  the  term  of  the  con- 
tract :  thus,  for  a  five  years'  insurance  four  annual 
premiums  are  charged  ;  for  a  ten-year  policy,  eight 
annual  premiums.  Another  method  of  premium 
payment  prevails,  chiefly  under  policies  covering 
manufactories,  especially  steam  mills,  in  the  king- 
dom of  Hungary.  It  consists  in  the  issuing  of 
five-year  policy  contracts  under  which  a  part  of  the 
premium  is  paid  on  the  delivery  of  the  policy,  a 
further  portion  in  two  instalments  in  the  second 
year,  and  the  balance,  as  a  rule,  during  the  first 
half  of  the  third  year. 

The  Austrian  tax  laws  provide  that  a  stock  com- 
pany shall  pay  ten  per  cent,  of  its  realized  profits 
by  way  of  income  tax,  but  the  profits  being  small 
this  tax  does  not  in  the  average  exceed  one-half  of 
one  per  cent,  of  the  annual  net  premiums.  Stock 
companies  which  distribute  more  than  ten  per  cent, 
in  dividends  have  to  pay  an  additional  two  per 


649 

cent,  upon  their  profits  ;  those  paying  from  eleven 
to  fifteen  per  cent,  in  dividends,  four  per  cent,  ad- 
ditional. With  mutual  insurance  companies  the 
tax  is  one-tenth'  of  one  per  cent,  of  the  annual  net 
premiums.  Besides  the  income  tax  the  Austrian 
Treasury  requires  the  affixing  of  a  fifty  kreutzer 
stamp  (about  twenty  cents)  to  every  policy.  By 
the  law  of  December  18,  1882,  fire  insurance 
companies,  both  native  and  foreign,  are  assessed 
two  per  cent,  upon  their  gross  premium  receipts 
on  their  Vienna  business,  as  a  contribution  for 
the  support  of  the  local  fire  departments.  The 
Common  Council  has  recently  ordered  an  in- 
crease of  this  amount  to  twenty  per  cent.,  to  be 
made  from  January  1,  1898,  against  which  a  pro- 
test has  already  been^  raised,  but  no  action  has 
thus  far  been  taken. 

BULGAEIA   AXD    ROUMANTA. 

In  Bulgaria  and  Roumania  no  government  de- 
partment or  official  is  specially  charged  with  the 
supervision  of  insurance,  nor  do  the  laws  require 
any  return  of  business  transacted.  Insurance 
legislation  follows  the  model  of  similar  enactments 
in  Austria,  but  the  regulations  are  enforced  more 
rigorously  in  these  countries. 

Fire  insurance  companies  are  operating  under 
the  commercial  law  enacted  in  1887,  which  contains 


650 

several  special  stipulations  concerning  insurance 
companies. 

There  is  no  law  fixing  the  minimum  amount  of 
subscribed  capital  applicable  to  native  companies, 
but  foreign  companies  are  compelled  to  deposit  a 
minimum  amount  of  Lei  300,000  (about  $60,000). 

Foreign  companies  are  also  required  to  secure  a 
government  concession,  after  obtaining  which  they 
can  transact  business  on  the  same  footing  as  native 
companies. 

Fire  insurance  is  not  undertaken  by  the  govern- 
ment or  by  any  municipality  in  Bulgaria  and  Eou- 
mania.  ISior  do  the  laws  require  inquests  after 
fires. 

Fire  policies  have  to  pay  a  stamp  duty  of  one- 
half  per  cent,  on  the  premiums,  and  there  is  also  a 
trade  and  income  tax.  The  particulars  furnished 
in  regard  to  taxation  in  these  countries  are  quite 
meagre.  Companies  are  not  compelled,  however, 
to  contribute  to  the  support  of  fire  brigades. 

In  Roumania,  the  "  Dacia  Romania, "  ''Nation- 
ala"  and  ''Generala"  have  a  common  tariff.  The 
mutual  company  ''Unirea"  has  a  separate  tariff 
of  its  own,  the  rates  of  which  are  lower.  In  Bul- 
garia the  native  companies  have  no  common  tariff. 

The  business  of  insurance  is  conducted  mainly 
through  local  agents  ;  only  in  exceptional  cases  is 
it  done  direct  with  the  offices. 


651 

Agents'  commission  does  not  exceed  fifteen  per 
cent.  In  a  very  few  cases  the  insured  may  receive 
a  commission  amounting  to  as  much  as  ten  per 
cent.  But  the  agents  frequently  give  away  a  por- 
tion of  the  commission  allowed  to  them. 

Nearly  all  simple  risks  are  written  on  one  or 
other  of  the  following  systems :  1.  Annual  poli- 
cies ;  2.  Seven-year  policies,  with  annual  pay- 
ments  of  premium ;  3.  Five-year  policies,  granted 
on  prepayment  of  four  years'  premium.  In  the 
case  of  seven-year  policies,  when  the  payments 
have  been  kept  up  for  six  years,  the  seventh  year 
is  free.  Farm  produce  is  insured  under  policies 
for  one,  two  or  three  months. 

Short-period  policies  are  issued  at  the  following 
proportions  of  the  annual  rate :  Six  months,  two- 
thirds  ;  three  months  and  under,  two-fifths. 

The  co-insurance  clause  is  invariably  enforced  in 
all  cases  of  under  insurance  ;  scarcely  an  instance 
to  the  contrary  is  to  be  met  with. 

Tenant's  and  neighbor's  risks  are  not  insured 
against. 

Losses  are  settled  by  the  company's  own  ex- 
perts, with  the  aid,  when  necessary,  of  skilled 
assistance  from  outside.  When  several  compan- 
ies are  interested,  the  usual  practice  is  to  appoint 
a  committee  of  two  or  three  ofiicials  who  operate 
jointly. 


652 


SERVIA. 


In  Servia,  fire  insurance  is  governed,  as  in  Aus- 
tria, by  an  ordinance  issued  by  the  government, 
but  there  is  no  insurance  department  or  state 
official  specially  charged  with  insurance  super- 
vision. 

Foreign  companies  are  obliged  to  own  real  estate 
in  the  kingdom  to  a  minimum  value  of  150,000 
dinars,  or,  say,  about  $30,000  each,  and  to  deposit 
twenty  per  cent,  of  their  premium  reserve  with  the 
State  authorities.  Otherwise,  they  operate  under 
the  same  regulations  as  native  companies.  Balance 
sheets  and  business  returns  must  be  presented 
annually. 

A  trade  and  income  tax  and  a  stamp  duty  on 
premiums  are  payable,  but  insurance  companies 
are  not  required  by  law  to  contribute  to  the  sup- 
port of  fire  departments.  There  is  no  government 
or  municipal  insurance. 

The  business  of  fire  insurance  is  conducted  mainly 
through  agencies,  who  correspond  with  the  head 
offices  or  with  the  branch  offices  at  Belgrade. 

The  agents'  commission  is  fifteen  per  cent,  on 
non-hazardous  risks,  and  from  ten  to  fifteen  per 
cent,  on  specials.  Commission  is  not  usually  al- 
lowed to  the  assured. 

Fire  insurances  are  usually  effected  for  periods 


653 

of  one,  five  or  ten  years,  with  rebates  in  the  two 
latter  cases  of  ten  per  cent,  and  twenty  per  cent, 
respectively,  when  an  undertaking  is  given  that 
the  policy  will  be  continued  for  the  full  term. 
Larger  rebates  are  made  when  the  premiums  for 
several  years  are  prepaid. 

The  co-insurance  clause  inserted  in  fire  policies 
reads  as  follows:  "If  the  insured  property  is,  at 
the  time  of  a  fire,  of  greater  value  than  the  amount 
insured  thereon,  the  loss  will  be  made  good  in  the 
ratio  in  which  such  greater  value  stands  to  the  sum 
insured.  If  the  company  has  only  insured  a  fixed 
share  of  the  value  as  declared  for  insurance,  it  will 
only  make  an  equivalent  share  of  the  loss  as  ad- 
justed. If  the  property  is  also  insured  elsewhere, 
with  the  knowledge  and  approval  of  the  company, 
the  latter  will  make  good  the  loss  in  the  ratio 
borne  by  the  aggregate  of  the  other  insurances  to 
the  amount  hereby  insured. 

Occasionally,  offices  grant  what  are  called  "  First 
Fire"  insurances,  without  average,  but  at  largely 
increased  rates. 

Liability  for  damage  to  neighbor's  or  landlord's 
property  is  not  insured  against. 

As  to  tariff  associations,  there  is  only  a  working 
agreement  between  one  British  and  one  Austrian 
company  for  the  rating  of  risks,  but  the  only 
native  company,  the  "Sadruga,"  founded  in  1887, 


654 

with  a  capital  of  300,000  dinars,  or,  say,  $60,000,  is 
not  a  party  thereto. 

Each  office  in  Servia  has  a  special  staff  of  its  own 
for  the  settlement  of  losses,  but  technical  assist- 
ance from  outside  is  freely  employed. 

Official  fire  inquests  are  held,  and  offices  may 
decline  to  settle  claims  until  the  assured  produces 
a  certificate  delivered  by  the  police  authorities  to 
the  effect  that  no  blame  attaches  to  him. 

RUSSIA. 

In  Russia  stock  companies  have  the  right  to  con- 
duct one  or  more  branches  of  insurance  upon  the 
condition  that  each  one  of  these  branches  shall  be 
protected  by  a  fully  paid-up  capital  of  at  least 
600,000  roubles,  about  $255,000.  Until  the  surplus, 
less  the  premium  reserve,  amounts  to  one-third  of 
the  original  capital  dividends  must  not  exceed 
seven  per  cent.,  and  until  the  expenses  of  organi- 
zation are  liquidated  they  must  not  exceed  six  per 
cent. 

The  fire  insurance  contract  is  regulated  by  the 
statutes  of  the  companies,  which  must  be  approved 
by  the  Imperial  Government.  They  contain  the 
general  rules  for  the  issuance  of  policies,  settle- 
ment of  losses,  etc.  The  statutes  of  the  various 
companies  practically  agree  in  their  main  pro- 
visions. 


655 

Fire  insurance  companies  come  under  no  special 
law  as  such,  but  they  are  subject  to  the  control  of 
a  government  department  known  as  the  assurance 
committee,  under  the  jurisdiction  of  the  Minister 
of  the  Interior.  This  committee  is  composed  of 
the  director  of  the  department,  as  chairman,  and 
two  associates  from  the  Finance  Ministry. 

The  application  of  managers  of  insurance  com- 
panies for  the  authorization  of  the  assurance  com- 
mittee is  responded  to  by  the  issuance  of  an  ap- 
proval. The  business  is  conducted  through  a 
special  division  of  the  Department  of  the  Interior. 
The  expenses  of  establishing  this  official  control 
are  paid  by  a  tax  levied  upon  the  total  sum  of 
premium  receipts  of  all  the  companies,  the  limit 
of  which  is  fixed  legally  every  three  years. 

The  supervision  of  the  assurance  committee  ex- 
tends to  all  insurance  institutions,  whether  govern- 
ment or  municipal,  stock  or  mutual,  native  or 
foreign.  It  applies  to  the  enforcement  of  the  ob- 
servance of  legal  and  statutory  requirements  by 
the  companies,  likewise  to  the  measures  for  regu- 
lating investments.  Its  jurisdiction  includes  par- 
ticularly the  giving  of  requisite  instructions  to 
government  or  municipal  mutual  insurance  com- 
panies, the  examination  of  complaints,  ordering 
revisions  and  revising  orders  issued  by  local  au- 
thorities touching  the  acceptance  of  risks  on  build- 


656 

ings.  As  to  private  insurance  companies,  the 
business  of  the  assurance  committee  involves  the 
approval  of  proposed  by-laws  at  the  organization 
of  companies,  the  amendments  of  their  statutory 
provisions  and  also  their  policy  conditions.  The 
examination  for  such  approval  covers  the  limita- 
tion of  the  probable  expense  of  organization,  which 
is  to  be  taken  out  of  the  original  capital,  as  well  as 
the  method  of  liquidating  the  same  ;  they  must 
not  expend  more  than  ten  per  cent,  of  their  original 
capital  in  effecting  their  organization  and  they 
must  liquidate  the  amount  in  the  course  of  ten 
years  at  the  most.  Fire  insurance  companies  must 
also  put  aside  a  reserve  of  not  less  than  forty  per 
cent,  of  their  premium  income.  The  assurance 
committee  establishes  the  forms  for  statement 
blanks,  balance  sheets  and  statistical  compilations 
which  insurance  companies  are  required  to  furnish 
every  year  to  the  department.  It  assumes  the 
oversight  and  examination  of  these  statements, 
etc. ;  causes  the  revision  of  business  rules  in  ac- 
cordance with  its  own  judgment,  the  desire  of  the 
stockholders  or  the  assured  ;  orders  the  retirement 
of  insurance  companies  in  cases  provided  for  in  the 
statutes,  and  takes  part  in  the  subsequent  liquida- 
tion. 

When  the  losses  reach  a  certain  limit  fixed  by 
the  statutes  of  the  company,  or  when  the  original 


657 

capital  has  decreased  two-fifths,  the  assurance 
committee  demands  the  call  of  a  general  meeting 
within  a  week  to  decide  upon  restoring  the  im- 
paired capital.  If  the  restoration  is  npt  made 
within  three  months  cessation  of  activity  is  ordered 
and  discontinuance  announced. 

The  liquidation  of  a  company  is  effected  through 
a  commission,  selected  by  a  general  meeting  of  the 
stockholders,  under  the  supervision  of  a  person 
appointed  by  the  Minister  of  the  Interior.  After 
the  expiration  of  one  year  these  liquidators  have 
to  furnish  an  account  of  their  labors  accompanied 
by  a  detailed  financial  statement.  If  it  then  ap- 
pears that  the  company  is  insolvent,  the  fact  is 
immediately  brought  to  the  attention  of  the  court, 
and  legal  proceedings  are  begun  to  wind  up  its  af- 
fairs. When  the  insolvency  is  judicially  an- 
nounced the  Minister  of  the  Interior  orders  the 
final  liquidation  in  conjunction  with  the  Ministers 
of  Finance  and  Justice.  A  newly  chosen  liquidat- 
ing commission  concludes  the  winding  up  of  the 
company. 

Insurance  supervision  in  Russia  includes  the  ap- 
proval of  agency  appointments.  Agents  may  also 
be  removed  by  the  assurance  committee. 

The  Russian  national  government  does  not  un- 
dertake fire  insurance,  but  many  municipalities 
do,  and  there  are  various  associations  of  agricul- 


658 

turists  which  conduct  a  form  of  mutual  insurance. 
The  nearest  approach  to  national  government  in- 
surance is  found  in  the  Russian  Reinsurance  Com- 
pany, which  began  business  in  January,  1896, 
having  been  organized,  upon  negotiations  of  the 
Minister  of  Finance  with  the  managers  of  the 
Russian  stock  insurance  companies,  for  the  pur- 
pose of  decreasing  the  re-insurance  with  foreigners. 
Every  year,  up  to  that  time,  as  the  native  insurance 
companies  did  not  divide  large  risks  with  one 
another,  two  thirds  of  the  premiums  received  from 
Russian  fire  insurance  were  given  over  to  for- 
eigners. The  company  was  organized  with  an 
original  capital  of  6,000,000  roubles,  or  about  $3,- 
060,000,  of  which  one-half  was  paid  in  by  eleven 
native  stock  companies,  while  the  other  half  was 
taken  over  by  private  individuals.  The  nominal 
price  of  the  share  was  established  at  500  roubles 
and  the  issuing  price  at  600  roubles,  thus  providing 
a  surplus  of  100  roubles  from  each  share,  the 
amount  of  which  was  invested  for  the  formation 
of  a  reserve. 

The  plan  of  the  company  contemplated  also  the 
mutual  re-insurance  of  tire  risks  among  the  native 
stock  companies.  Since  it  began  business  the 
Russian  fire  insurance  companies  have  been  obliged 
to  cover  sixty  per  cent,  of  their  excess  business  by 
division  with  the  Russian  Reinsurance  Company 


659 

and  among  themselves,  and  only  forty  per  cent,  in 
foreign  companies. 

As  was  anticipated,  the  so-called  national  system 
has  not  justified  its  existence.  Already,  after  the 
lapse  of  only  two  years  very  fruitful  in  losses,  the 
foreigner  has  again  taken  precedence,  and  his  por- 
tion of  the  re-insurance  must  be  increased  from 
forty  to  fifty  per  cent.  The  business  results  of  the 
National  Reinsurance  Company  have  also  been 
very  unsatisfactory.  However,  an  ''All  Russian 
Reinsurance  Company"  for  mutual  companies  is 
to  be  organized  in  Moscow  with  a  capital  of  5,000,- 
000  roubles. 

Aside  from  the  aforesaid  National  Russian  Re- 
insurance Company  there  are  thirteen  native  stock 
fire  insurance  companies.  There  are  not  fewer 
than  136  mutual  institutions.  There  are  also 
seventy -three  municipnl,  thirty-four  provincial  and 
twenty -nine  state  concerns.  Of  the  seventy-three 
municipal  institutions  forty-three  accept  risks  on 
buildings  only,  and  thirty  take  also  insurance  on 
household  furniture  and  other  contents. 

There  is  still  to  be  mentioned  the. ''  Kjewer  "  as- 
sociation, for  the  insurance  of  sugar  factories, 
nearly  all  of  whose  risks  are  given  in  re-insurance. 
The  premium  receipts  of  its  business  in  the  year 
1896  amounted  to  456,127  roubles,  or  about  $232,- 
625;  its  losses  were  only  8,061  roubles,  or  about 


660 

$4,131  ;  its  surplus  aggregated  500,000  roubles— 
$255,000,  and  it  also  had  a  special  reserve  of  95,778 
roubles— $48,846. 

No  foreign  fire  insurance  company  operates  in 
Russia  direct,  but,  as  already  noticed,  foreign 
companies  do  a  large  business  by  re-insurance. 
They  are  permitted  to  transact  business  upon 
the  same  terms  as  native  companies,  but  are 
obliged  to  deposit  the  amount  of  500,000  roubles, 
together  with  their  premium  reserve,  in  the  State 
bank,  except  in  Finland,  where  the  laws  are  quite 
different,  and  foreign  companies  are  allowed  to 
operate  without  making  any  deposit. 

Since  wooden  buildings  everywhere  predominate, 
even  in  the  large  cities,  and  the  manifold  fire  ex- 
tinguishing contrivances  being  defective,  numerous 
fires  occur  by  which  whole  villages,  small  cities 
and  whole  sections  of  large  cities  are  destroyed ; 
these  happen  especially  in  the  western  Provinces, 
where  there  are  many  mercantile  establishments 
and  thickly  populated  settlements.  •  In  the  sum- 
mer and  autumn  the  greatest  number  of  fires  oc- 
cur. The  years  1896  and  1897  were  especially  fruit- 
ful in  losses  for  the  insurance  companies. 

The  ordinary  insurance  conditions  of  Russian 
private  fire  insurance  companies  contain  nothing 
opposed  to  the  principle  that  insurances  should 
lead  to  no  profit  to  the  assured.    Worthy  of  men- 


661 

tion  is  the  practice  of  requiring  the  applicant  for 
insurance  to  leave  a  deposit,  for  which  receipt  is 
given,  as  security  for  any  disbursements  which 
may  be  necessitated  before  the  completion  of  the 
transaction.  Buildings  and  machinery  are  insured 
at  such  value  as  the  owner  may  place  upon  them  ; 
nevertheless,  the  value  on  the  day  of  the  fire  is  the 
sole  standard  of  reckoning  indemnity.  Indirect 
loss  is  not  insured  against  in  Russia,  as  the  law 
does  not  create  any  liability  in  respect  of  neigh- 
bors' property.  In  Poland,  however,  the  Code 
Napoleon  is  in  force.  Mortgage  creditors  can 
have  their  claims  secured  by  an  appropriate  clause 
in  the  policy. 

According  to  the  policy  conditions,  the  party 
whose  property  may  be  damaged  by  fire  is  obliged, 
on  demand,  to  furnish  a  sworn  statement  that  the 
fire  occurred  without  his  fault,  and  the  payment  of 
the  indemnity  can  be  refused  in  case  the  assured 
is  judicially  under  suspicion  of  arson  or  of  fraud, 
until  he  is  acquitted.  There  is  no  special  law  relat- 
ing to  fire  inquests.  The  duty  of  inquiring  into  the 
causes  of  fires  devolves  upon  the  police,  without 
whose  authority  no  loss  payment  can  be  made. 

Insurance  oflSces  are  not  compelled  to  contribute 
to  the  maintenance  of  fire  brigades,  but  in  many 
instances  they  do* so  voluntarily. 

A  general  tariff  of  rates  prevails,  which  is  drawn 


662 

up  and  promulgated  by  a  committee  of  the  Russian 
fire  insurance  companies.  Agricultural  risks  in 
Poland  are  governed  by  a  special  tariff.  Business 
is  done  through  the  medium  of  local  agents,  also 
with  offices  direct.  The  companies  allow  their 
agents  ten  to  fifteen  per  cent,  commission,  any  re- 
bate of  which  is  prohibited  by  tariff  rules. 

Policies  are  generally  issued  for  one  year  and  are 
renewable  annually.  Sometimes,  however,  the  in- 
surance is  effected  for  three,  five  or  ten  years,  with 
a  discount  for  prepayment  of  premiums.  Poland 
is  the  only  district  where  ten-year  policies  are 
issued  with  the  premium  payable  annually.  The 
co-insurance  clause  is  not  obligatory,  and  is  usually 
enforced  on  hazardous  risks  only,  such  as  saw 
mills,  flour  mills,  etc.  It  has  been  in  use  in  Rus- 
sian offices  for  about  twenty  years. 

Losses  are  generally  adjusted  by  specially  ap- 
pointed professional  assessors.  Small  risks  are 
usually  adjusted  by  the  agents. 

Fire  insurance  companies  are  taxed  at  the  rate  of 
fifty  copecks  on  every  1,000  roubles  of  the  sum  in- 
sured, but  the  tax  must  not  exceed  twenty  per  cent, 
of  the  premium. 

The  fourteen  Russian  stock  fire  insurance  com- 
panies, including  the  Russian  Re-insurance  Com- 
pany, with  an  aggregate  capital  6f  $15,136,800,  re- 
ceived ill  the  year  1896  gross  premiums  amounting 


663 

to  $26,894,963,  of  which  they  retained  for  their 
own  account  $13,907,969.  They  paid  for  losses  on 
their  own  account,  including  reserves,  $7,62(»,869. 
Their  surplus  on  January  1,  1896,  was  reported  to 
be  $6,122,517;  on  January  1,  1897,  $7,098,905. 
They  carried  over  a  surplus  of  fire  insurance  re- 
serves as  follows  :  From  the  losses  of  previous 
years  of  $72,810,  and  from  the  premiums  of  the 
year  1895,  $3,664,554.  The  premium  reserve  upon 
1897  aggregated  $6,240,730.  Their  interest  receipts 
upon  investments,  including  differences  in  value, 
amounted  to  $1,240,505.  The  business  of  the  year 
showed  a  net  insurance  profit  of  $245, 590.  The  total 
net  expense  account  amounted  to  $3,538,114. 

NORWAY. 

Up  to  the  present  time  no  law  has  been  enacted 
specially  applying  to  the  business  of  insurance  in 
Norway ;  such  as  there  is  embraces  an  old  decree 
of  May  15,  1810,  the  insufficiency  of  which  was 
recognized  by  a  law  of  August  9, 1839.  In  this  law 
those  companies  received  some  special  prerogatives 
which  had  sought  and  obtained  a  royal  license. 
This  license  is  not  required  imperatively.  Under 
date  of  January  8,  1881,  a  Commission  was  ap- 
pointed to  attempt  to  remedy  the  difliculties  by 
legislation.  This  Commission  presented  on  the  3d 
of  May,  1894,  the  draft  of  a  law  concerning  stock 


664 

companies  generally,  and  on  the  23d  of  December, 
1895,  the  draft  of  a  law  relating  to  insurance  com- 
panies particularly.  The  bill  has  not  yet  passed  in 
the  Storting.  Probably  it  will  be  approved  this 
year.  The  purpose  of  the  bill  in  the  main  is  to 
uphold  the  principle  of  freedom  in  the  transaction 
of  insurance.  A  concession  is  not  even  to  be  in- 
sisted on  in  Norway.  There  is  only  the  entry  of  a 
permit  to  do  business  to  be  made  in  the  Commercial 
Register,  and  in  order  to  bring  this  about  definite 
information  and  proofs  of  solvency  of  the  company 
must  be  furnished.  The  insurance  department  is 
to  consist  of  three  associate  officials,  but  none  of 
these  may  possess  stock  of  any  of  the  insurance 
companies,  or  be  a  member  of  the  board  of  directors 
or  of  the  business  management  of  such  company. 
The  cost  of  the  government  supervision  is  to  be 
met  by  a  tax  which  must  not  exceed  two  per  cent, 
of  the  annual  gross  income.  All  publications  re- 
lating to  companies  are  to  be  paid  for  by  the  com- 
panies concerned.  For  the  preparation  of  the 
financial  statement  the  bill  sets  forth  certain  normal 
prescriptions.  The  statement  must  be  furnished  at 
least  once  a  year,  and  within  six  months  after  the 
close  of  the  fiscal  year.  Publication  follows  after 
its  examination  by  the  insurance  department  at 
the  expense  of  the  company.  Separate  accounts 
must  be  presented  for  the  different  branches,  and 


666 

also  for  the  Norwegian  and  for  the  foreign  business. 
Besides,  the  premium  reserve  must  be  maintained 
for  at  least  one-third  of  the  total  premiums  received 
and  in  force  without  deduction  of  expenses.  The 
law  contains  requirements  concerning  the  limita- 
tions of  the  original  capital  in  the  organizing  of 
companies,  also  concerning  the  fixing  of  the  limit  of 
the  amount  of  insurance  of  mutual  companies  with- 
out guarantee  funds  and  concerning  liquidation. 

Foreign  companies  must  appoint  a  fully  author- 
ized representative,  who  is  accountable  to  the 
supervising  authorities,  and  who  has  to  represent 
the  company  for  service  of  process.  The  deposit 
for  the  security  of  Norwegian  policy-holders  must 
not  be  less  than  50,000  crowns  nor  more  than 
100,000  crowns  ($13,400  to  $26,800). 

The  eight  Norwegian  stock  fire  insurance  com- 
panies received  in  the  year  1896  gross  premiums  of 
2,299,515  crowns  and  paid  for  re-insurance  1,268, 933 
crowns.  In  addition  to  their  net  premium  income 
of  1,030,582  crowns,  about  $276,195,  they  received 
for  interest  and  from  other  sources  the  sum  of 
414,977  crowns,  about  $111,214.  The  net  amount 
of  losses  were  581,261  crowns,  about  $155,778,  and 
of  commission  and  expenses  306,650  crowns,  about 
$82,182.  The  total  profit  for  the  year  was  557,648 
crowns,  or  about  $149,449,  and  the  underwriting 
profit  142,671  crowns,  or  $38,235. 


666 

A  government  institution  for  insurance  of  build- 
ings against  fire  has  existed  for  years  in  Norway. 
At  the  close  of  the  year  1896  buildings  were  insured 
in  the  country  for  the  amount  of  990,500,000  crowns 
($266,454,000),  or  44,000,000  crowns  ($11,792,000) 
more  than  in  the  year  1895.  Of  this  sum  600,000,- 
000  crowns  were  in  the  cities  and  390,500,000  in  the 
country.  The  capital  city,  Christiania,  alone  re- 
presented about  one-fourth  of  the  insurance  amount 
of  the  entire  kingdom,  and  over  five-twelfths  of 
that  of  the  Norwegian  cities. 

Formerly  many  disastrous  fires,  consuming  en- 
tire villages  occurred  in  Norway.  In  recent  years 
the  country  has  been  spared  such  calamities,  until 
1897,  when  a  relapse  occurred.  These  great  fires 
prevail  because  of  the  light  construction  of  build- 
ings, the  high  winds  and  the  inadequacy  of  the 
means  of  fighting  fires. 

The  ordinary  insurance  conditions  in  Norwegian 
policies  do  not  differ  in  their  essential  points  from 
those  in  use  in  Germany.  Insurance  against  loss 
of  rent  prevails. 

Taxes  bear  heavily  upon  the  business  of  insur- 
ance. They  comprise  now  more  than  one-quarter 
of  the  expense  account.  In  1897  3.97  per  cent,  of 
the  income  and  one- third  of  one  per  cent,  of  the  as- 
sets were  demanded  as  government  tax,  added  to 
which  there  were  local  imposts  of  11.27  per  cent. 


667 

The  income  of  a  foreign  company  is  appraised,  and 
ten  times  the  amount  thereof  is  assumed  to  be  its 
assets. 

The  Norwegian  Tariif  Association  is  formed  of 
the  native  and  foreign  companies  operating  in 
Norway,  and  extends  over  all  Norway  and  com- 
prises the  entire  ordinary  and  commercial  busi- 
ness. The  commission  is  fifteen  per  cent.,  of 
which  the  sub-agent  receives  ten  per  cent. 

SWEDEN. 

In  Sweden  there  is  no  government  department 
devoted  exclusively  to  insurance  supervision,  nor 
any  complete  code  of  statutory  requirements.  The 
royal  sanction  for  the  passage  of  a  new  law  regard- 
ing stock  companies  was  given  in  1895,  and  efforts 
have  since  been  made  to  perfect  a  plan  for  a  code 
of  laws  covering  the  entire  subject,  but  so  far 
without  result.  State  supervision  is,  however,  ex- 
ercised to  a  limited  extent  through  the  Civil 
Department  of  the  kingdom. 

A  royal  decree  of  October  22,  1886,  requires 
domestic  insurance  companies  to  prepare  a  state- 
ment and  balance  sheet  according  to  prescribed 
forms,  and  to  present  them  to  the  Civil  Depart- 
ment ;  also,  to  publish  these  statements  and  to 
hold  the  books  and  papers  of  their  business  acces- 
sible  to  the   oflUcial  in  that   department  charged 


668 

with  looking  after  insurance  affairs,  or  to  a  specially 
designated  state  official.  This  law  also  requires 
every  foreign  company  to  have  one  fully  author- 
ized general  manager  in  Sweden,  who  has  to  obtain 
a  license  from  the  governor  of  the  province  in 
which  he  is  located,  submitting  to  that  official  his 
power  of  attorney  and  a  copy  of  the  by-laws  of  his 
company.  The  license  has  to  be  published  in  a 
newspaper.  If  for  any  reason  authority  to  re- 
present the  company  is  annulled  without  the  ap- 
pointment of  a  new  general  manager,  the  governor 
names  a  reliable  person  to  act  until  the  installation 
of  his  successor.  No  company  is  permitted  to  have 
more  than  one  general  manager,  but  the  manager 
may  appoint  several  sub-agents.  The  general 
manager  is  required  to  notify  the  governor  of  every 
amendment  or  change  made  in  the  company's  by- 
laws ;  to  submit  to  the  proper  official  in  the  Civil 
Department  his  books  on  demand,  and  also  to 
present,  annually,  a  balance  sheet  and  business 
statement  on  prescribed  forms.  If  an  alien  com- 
pany has  not  supplied  its  manager  with  the  neces- 
sary funds  to  pay  a  loss  within  three  months  after 
the  maturity  of  a  claim,  he  must  communicate  the 
fact  to  the  governor ;  and  he  must  also  give  im- 
mediate notice  if,  through  fault  of  the  parent  com- 
pany, he  cannot  forward  amendments  made  in  by- 
laws or  copies  of  his  balance  sheet  and  business 


statement.  Fines  ranging  from  $5  to  $130  are  im- 
posed for  breach  of  these  requirements. 

Taxes  are  levied  upon  insurance  companies  in 
Sweden  in  the  same  manner  as  they  are  upon  every 
other  company  or  private  person  in  the  kingdom. 
They  usually  amount  to  one  per  cent,  of  the  profit 
of  the  foregoing  year.  By  a  special  resolution  of 
the  Diet,  this  tax  may,  however,  be  increased  to 
one  and  one-half  or  two  per  cent.  Besides  this 
tax,  foreign  companies  have  to  pay  a  small  stamp 
fee  for  each  policy  issued 

There  are  five  native  stock  fire  insurance  com- 
panies in  Sweden,  with  an  aggregate  paid  up 
capital  of  $2,760,000.  In  1896  their  assets  amounted 
to  $26,129,171,  and  their  liabilities  to  $21,698,124. 

There  are  also  twelve  large  mutual  companies, 
of  which  only  six  transact  business  throughout  the 
kingdom,  while  three  more  limit  their  field  to  one 
province,  and  the  others  include  in  their  operations 
only  single  provinces  or  cities.  The  number  of 
small  mutual  concerns  or  unions  is  360. 

In  the  year  1895  seventeen  foreign  fire  insurance 
companies  operated  in  Sweden,  among  them  twelve 
British  and  two  German. 

The  bulk  of  the  business  remains  in  the  hands  of 
the  Swedish  stock  companies,  and  next  to  them 
rank  the  domestic  mutuals. 

The  control  of  insurance  by  means  of  State  super- 


670 

vision  is  leniently  conducted  and  does  not  fetter 
the  freedom  of  action  of  the  solid  insurance  insti- 
tutions. 

Commissions  are  generally  fifteen  per  cent.,  of 
which  ten  per  cent,  goes  to  the  sub-agent. 

The  Swedish-Norwegian  Tariff  Association  in- 
cludes the  entire  area  of  the  two  kingdoms  and 
conducts  the  convention  in  a  formal  and  systematic 
manner.  The  two  German  companies  do  not  belong 
to  the  association,  but  are  guided  by  the  Swedish 
tariff. 

The  general  insurance  conditions  do  not  differ  in 
substance  from  those  in  Germany. 

In  the  "fire  regulations"  for  the  towns  of  the 
kingdom  it  is  stipulated  that  an  inquest  shall  be 
made  by  the  magistrate  or  the  police  ofl[ice  after 
each  fire,  in  order  to  ascertain  the  origin  of  the 
fire.  These  regulations  are  applicable  not  only  to 
all  cities  and  towns  in  the  kingdom,  but  also  to  all 
boroughs,  harbors,  fishing  places  and  other  places 
with  any  considerable  population,  should  the  at- 
tending circumstances  seem  to  render  such  an  in- 
quiry necessary.  If  a  fire  occur  in  the  country  dis- 
tricts such  inquest  is  not  obligatory  under  the  laws, 
but  the  insurance  companies  have  stipulated  in 
their  policy  conditions  that  they  shall  have  the 
right  to  demand  an  inquest  and  a  report  of  the 
findings  before  the  claim  shall  be  payable. 


671 

The  aggregate  receipts  of  the  five  Swedish  fire 
insurance  companies  in  the  year  1896  were  :  Prem- 
iums, $3,190,508;  interest,  $78,662;  other  receipts, 
$230,352.  Their  total  expenditures  were:  Gross 
fire  losses,  $1,773,767,  of  which  were  distributed  for 
re-insurance,  $954,416  and  for  own  account,  $819,- 
351 ;  expenses,  $213,041  ;  commissions,  $540,064. 

The  leading  mutual  concerns  received  in  the  same 
year  $628,465  in  premiums,  and  paid  $200,406  in 
losses  and  $135,927  in  expenses. 

DENMAKK. 

There  are  no  special  statutory  requirements  for 
the  organization  and  admission  of  fire  insurance 
companies  in  Denmark.  No  insurance  department 
exists.  A  deposit  is  not  even  demanded  of  foreign 
companies. 

Concerning  the  ordinary  insurance  conditions  of 
Danish  policies  there  is  nothing  worthy  of  remark. 
In  their  principal  points  they  do  not  differ  from 
the  Swedish  and  German  conditions. 

In  addition  to  ordinary  insurance  against  fire 
risk  on  buildings  and  their  contents,  insurance 
against  loss  of  rent  has  been  written  by  the  "  Kjo- 
benhavns  Brandf orsikring  "  (Copenhagen  Fire  In- 
surance Company),  a  mutual  institution,  for  its 
members  since  January  1,  1896,  and  has  afforded 
satisfactory  results.     The  contract  is  made  in   a 


672 

special  policy  and  has  for  its  object  indemnity  for 
loss  of  house  rent  in  consequence  of  fire  or  explo- 
sion in  insured  buildings.  The  sum  insured  is,  as  a 
rule,  limited  to  the  amount  of  the  annual  income 
from  the  rents  for  one  year,  but  if  the  building 
concerned  is  specially  large  the  insurance  is  per- 
mitted up  to  the  amount  of  two  annual  rentals. 
Loss  of  rent  applies  only  in  cases  where  the  insured 
building  is  damaged  wholly  or  in  part  so  that  it 
cannot  be  used  for  the  purposes  intended  before  the 
fire.  The  assured  is  required  to  make  affidavit  as 
to  the  amount  of  the  rent.  If  the  rent  ascertained 
is  greater  than  the  sum  insured  the  loss  is  reckoned 
pro  rata.  In  all  other  cases  the  rent  actually  re- 
ceivable, without  regard  to  the  sum  insured,  serves 
as  the  basis  of  adjustment. 

A  tariff  association  has  existed  in  Denmark  since 
1896.  It  confines  its  ratings  chiefly  to  Copenhagen 
and  the  suburb  of  Fredericksburg,  and  beyond 
these  to  factories,  stocks  and  large  warehouses  only. 
Not  fewer  than  forty-eight  companies  belong  to  the 
association.  The  agreement  is  signed  for  a  definite 
time  and  can  be  annulled  by  any  company  on  six 
months'  notice.  No  representative  of  a  tariff  com- 
pany is  allowed  to  represent  a  non-tariff  company. 

Business  in  Denmark  is  written  mainly  through 
agents.  The  commission  is  seventeen  and  one- half 
percent.,  of  which  sub-agent«  receive  ten  per  cent. 


673 

To  all  policies  written  in  Denmark  a  paper  stamp 
or  a  stamp  impression  must  be  affixed.  Insurance 
policies  for  amounts  under  1,000  crowns,  about  $270, 
are  stamp  free  ;  for  amounts  above  1,000  crowns 
the  stamp  differs  in  value  for  one  year  and  for  more 
than  one  year,  and  also  according  to  the  sum  in- 
sured. For  sums  of  1,000  to  2,000  crowns  the 
stamp  tax  is  five  ore,  about  one  and  one-third  cents, 
for  one  year,  and  fifteen  ore,  about  four  cents,  for 
more  than  one  year  ;  for  sums  of  2,000  to  10,000 
crowns  insurance,  fifteen  ore,  or  about  four  cents; 
for  one  year ;  thirty  ore,  about  eight  cents,  for 
more  than  one  year,  and  the  tax  increases  after 
that  with  every  10,000  crowns  about  fifteen  to 
twenty  ore  for  one  year  and  thirty  to  thirty-five 
ore  for  more  than  one  year. 

The  four  leading  Danish  fire  insurance  companies, 
two  of  which  are  stock  companies  with  a  paid-up 
capital  of  $281,400  had,  in  1896,  a  premium  income 
aggregating  $1,198,727.  They  received  from  in- 
terest and  rent  and  profits  of  exchange  $52,427, 
and  from  other  sources  $8,849.  Their  disburse- 
ments were  for  losses,  less  re-insurances,  $984,889  ; 
for  commissions  and  management  expenses,  $225, 210, 
and  for  other  expenses,  $9,788.  Their  funds,  other 
than  share  capital,  aggregated  $1,323,900.  The  di- 
vidends of  the  two  stock  companies  were,  in  one  case, 
thirty-one  per  cent.,  and  in  another  six  per  cent. 


674 


THE    NETHERLAN^DS. 


There   are  no   statutory   requirements    for    the 
organization  of  insurance  companies  in  this  king- 
dom.    There  is  neither  a  minimum  capital  pre- 
scribed nor  a  financial  statement  to  be  published. 
In  order  to  be  recognized  before  the  courts  of  Hol- 
land as  domiciled  companies,  they  must  acquire 
the  rights  of  domestic  partnership,  which  will  be 
conferred  upon  them  by  the  sovereign  when  the 
by-laws  of  the  company  do  not  conflict  with  the 
commercial  code  of  Holland.     With  the  exception 
of    the    "Netherlands,"    a    company    which    has 
established  a  United   States  branch,  with  head- 
quarters in  the    city  of  New  York,  there  is  no 
domestic  company  of    strong  financial   standing. 
There  are  seventy-seven  companies  in  all,  mostly 
small,  of  which  twelve  have  their  home  offices  in 
the  Island  of  Java.     The  fire  companies  generally 
avoid  giving  publicity   to  their   statements,   but 
while  the  resources  of  most  of  them  are  exceed- 
ingly limited,  as  has  been  stated,  insolvency  is  of 
rare  occurrence.     The  financial  weakness  of  the 
native  companies  and  the  diminutive  scale  on  which 
they  work  have  aided  the  British,  German  and 
French  companies  in  securing  an  unusually  large 
share  of  the  business  for  themselves. 

A  peculiar  practice  in  issuing  policies  exists  in 


675 

this  country.  Instead  of  issuing  a  separate  policy 
by  each  company,  a  general  policy  blank  is  used. 
The  companies,  by  their  officers  or  agents  in  Am- 
sterdam and  Rotterdam,  appear  on  the  bourse  dur- 
ing the  business  hours  of  the  day  for  the  purpose 
of  receiving  offers  of  insurance  from  property  own- 
ers direct  or  from  brokers,  for  such  insurance 
protection  as  may  be  needed.  A  policy  blank  is 
presented  to  them,  and  upon  this  blank  is  written 
the  amount  which  each  company  will  accept  of  the 
line  which  may  be  required,  so  that  no  matter  how 
large  the  amount  may  be  the  assured  receives  but 
one  policy.  The  conditions  of  these  bourse  policies 
differ  from  the  insurance  contract  generally  used 
in  other  countries,  since  they  cover  losses  resulting 
from  war,  rebellion,  riot  or  earthquake,  as  well  as 
from  fire.  The  descriptions  of  the  risk  written 
are  generally  exceedingly  vague,  and  the  value  of 
the  property  insured  is  admitted  without  any  pre- 
vious ascertainment  of  what  it  is,  the  companies 
relying  upon  the  honesty  and  good  faith  of  the 
parties  with  whom  they  deal.  The  adjustment  of 
a  loss  is  usually  left  to  the  first  two  or  three  com- 
panies whose  names  appear  upon  the  policy,  and 
the  broker  placing  the  insurance  is  commonly  em- 
ployed to  adjust  the  loss.  If  no  agreement  can  be 
reached,  the  question  of  difference  is  referred  to 
an  arbitrator.     Provision  is  made  in  the  law  for  an 


676 

investigation  by  the  police  of  the  origin  of  such 
fires  as  may  happen,  and  fraud,  or  attempted 
fraud,  being  condemned  by  public  sentiment,  is 
generally  punished.  There  is  no  tariff  of  rates, 
this  question  being  left  to  the  individual  judgment 
of  the  companies. 

Taxation  is  based  upon  the  net  profits,  estimated 
at  ten  per  cent,  of  the  net  premium  income,  upon 
which  a  tax  is  levied  of  two  and  one-half  per  cent. 
With  companies  whose  net  profits  are  not  known 
to  the  government  official,  an  estimate  is  made  of 
the  amount  on  the  basis  of  ten  per  cent.  of»the 
supposed  premium  income  derived  in  the  country, 
md  upon  that  amount  the  tax  of  two  and  one -half 
per  cent,  is  charged. 

GERMANY. 

While  the  business  of  fire  insurance  and  the 
regulation  of  it  is  subject  to  imperial  legislation, 
no  federal  code  of  insurance  laws  has  yet  been 
enacted.  Such  a  code  is  now  receiving  the  con- 
sideration of  the  Diet,  and  in  due  time  will  prob- 
ably be  adopted.  Meanwhile,  each  of  the  several 
States  prescribes  the  conditions  upon  which  the 
business  may  be  carried  on  within  its  limits,  the 
laws  differing  widely  in  their  scope  and  purpose. 

In  nearly  all  of  the  German  States  insurance  com- 
panies require  a  government  concession  as  a  pre- 


677 

requisite  to  their  admission,  exceptions  to  ibis  rule 
being  made,  however,  in  the  Hanseatic  cities  of 
Hamburg,  Bremen  and  Lubeck,  where  complete 
liberty  to  carry  on  the  business  unimpeded  is 
freely  accorded  to  all,  except  that  in  Bremen  a 
government  permit  is  necessary  for  the  insuring  of 
buildings.  This  permit  is  not  alone  applicable  to 
companies  alien  to  the  country,  but  applies  equally 
to  those  of  the  other  States  comprised  in  the  em- 
pire. The  concession  by  its  terms  is  generally 
revocable  at  the  will  of  the  authorities  of  the  State 
granting  it,  and  binds  the  company  receiving  it  to 
a  strict  observance  of  all  the  existing  legal  and 
ministerial  prescriptions.  No  difference  whatever 
is  made  between  home  and  foreign  companies,  but 
the  latter  are  required  : 

First. — To  designate  a  place  within  the  State  as 
the  legal  residence  of  the  company,  and  to  aiD- 
point  at  such  place  a  general  or  principal  agent, 
who  shall  be  empowered  to  represent  the  com- 
pany in  its  relations  with  the  government  and 
with  the  insured,  and  who  shall  be  responsible 
for  the  business  transacted. 

Second. — To  agree  to  be  amenable  to  the  juris 
diction  of  the  Courts  in  the  State  where  the  gen- 
eral agency  is  established,  and  to  submit  to  the 
State  authorities  for  their  approval  their  deeds  of 
settlement  and  by-laws  under  which  their  business 


678 

is  conducted  for  the  approval  of  the  officials  of 
such  State. 

No  deposit  is  required  to  be  made  either  with 
the  imperial  or  the  State  governments,  although 
some  of  the  States  have  reserved  the  right  to  de- 
mand a  bond  if  same  should  be  regarded  as 
necessary  for  the  protection  of  property  owners. 
A  modified  system  of  supervision  is  exercised  in 
each  of  the  German  States  by  the  government 
officials  of  such  States.  In  Wurtemberg  all  com- 
panies are  subject  to  the  supervision  of  a  govern- 
ment commissioner,  to  whom  the  general  agents  of 
all  companies  are  required  upon  demand  to  sub- 
mit their  books  for  his  inspection  and  examina- 
tion, and  are  required  to  supply  him  with  any 
information  which  he  may  need  regarding  the 
detail  of  the  administration  of  their  business,  the 
expenses  of  this  government  inspection  being 
borne  by  the  companies.  In  Saxony  the  super- 
vision of  the  business  of  insurance  is  intrusted  to 
an  intermediate  Court  known  as  the  "Fire  In- 
surance Chamber,"  whose  authority,  however,  is 
not  as  far-reaching  as  that  granted  to  the  com 
missioner  in  Wurtemberg.  For  the  rest  of  the 
States,  supervision  is  limited  to  the  examination 
of  the  reports  which  are  required  to  be  presented 
yearly  in  nearly  all  of  the  States  to  certain  desig- 
nated officials  in  such  States  respectively.    These 


679 

reports,  for  the  most  part,  are  required  to  con- 
tain a  synopsis  of  the  business  transacted  during 
the  previous  year,  a  brief  summary  only  being 
required.  In  Prussia,  however,  the  companies 
are  required  to  file  with  the  supervising  author- 
ities a  profit  and  loss  account,  balance  sheet  and 
an  annual  report  containing  a  synopsis  of  the 
business  transacted — the  same  to  be  rendered 
within  six  months  after  the  close  of  the  year's 
business — and  are  required  to  publish  a  profit 
and  loss  at;count,  and  likewise  a  balance  sheet,  in 
the  imperial  as  well  as  in  the  State  official  paper 
designated  for  that  purpose..  In  making  up  the 
profit  and  loss  account  the  following  among  other 
rules  are  prescribed : 

First. — The  unearned  premium  fund  must  be 
calculated  pro  rata,  from  which  may  be  deducted 
the  commission  paid  ratably  for  the  unexpired 
time  the  policies  have  to  run,  but  only  such  pre- 
mium receipts  shall  be  included  under  policies 
which  have  already  attached  during  the  period 
over  which  the  account  extends.  The  statement, 
besides  containing  a  summary  of  the  business, 
must  also  show  in  detail  resisted  claims,  expenses 
allowed  for  salary,  traveling,  etc.,  the  commission 
paid  and  likewise  a  list  of  the  real  estate  and 
other  securities  owned  by  the  company.  In 
brief,    the    requirements    of  the  statements    are 


680 

very   similar  to  those  which  exist  in  the  United 
States  at  the  present  time. 

The  development  of  the  fire  insurance  business 
in  Germany  has  brought   into   existence  various 
classes   of   associations   widely   different  in  their 
characteristics.     Prominent  among  these  are  the 
so-called  Public  Fire  Societies,  founded  with  gov- 
ernment help  in  various  States  for  the  most  part 
during  the  last  century  with  the  object  of  sup- 
pressing  mendicity   in    consequence    of  loss    by 
fire.     They  are  based  upon  mutual  principles  and 
insure  real  estate  almost  exclusively.     They  enjoy 
certain  privileges,  such  as  exemption  from  contri- 
bution for  stamps,  perquisites  and  taxes.     They 
also  have  authority  to  collect  arrears  of  assess- 
ments by  execution  and  may  use  government  and 
municipal  functionaries  in  their  service.     In  many 
of  the  smaller  States  they  possess  the  exclusive 
privilege   of   insuring   immovables,  and  in  some 
States  insurance  of  all  buildings,  with  few  excep- 
tions,   in    these    institutions    is    obligatory.      In 
Prussia  the  field   of  operation   of  one   of  these 
Public  Fire  Societies  is  usually  circumscribed  by 
the  bounds  of  a  single  province  or  only  a  part  of 
the  same.    Formerly  membership  in  these  societies 
was  also  compulsory,  but  now  in  the  old  provinces 
of  Prussia  absolute  liberty  of  insurance  prevails, 
except  in  a  few  towns  where  all  buildings  must 


681 

still  be  insured  in  tlie  existing  municipal  asso- 
ciations. In  the  newly  annexed  provinces  of 
Prussia  (Hanover,  Nassau,  etc.),  however,  where 
the  legislation  existing  before  annexation  has  re- 
mained in  force,  compulsory  insurance  of  all 
buildings  in  public  associations  still  prevails. 
Besides  the  insurance  of  real  estate,  some  of 
the  Prussian  associations  also  insure  movable 
property,  but  in  this  regard  they  do  not  enjoy 
any  special  privileges. 

The  private  insurance  institutions  are  either 
mutual  or  based  upon  stock.  Few  of  the  for- 
mer are  of  any  importance,  though  there  are 
many  small  unions  having  limited  fields  of  acti- 
vity. 

Besides  the  foregoing,  there  are  twenty-nine 
joint  stock  companies  which  transact  fire  insur- 
ance business  either  exclusively  or  in  connection 
with  other  branches  of  insurance.  According  to 
the  Prussian  Joint  Stock  Companies  Act  of  July 
16,  1884,  the  shares  of  stock  insurance  companies 
must  amount  to  at  least  1,000  marks,  or  about 
$240  each,  of  which  twenty-five  i)er  cent,  must  be 
paid  up  When  a  fire  insurance  company  is  estab- 
lished the  Minister  of  the  Interior,  who  has  the 
granting  of  the  concession,  is  also  empowered  to 
fix  the  limit  of  the  capital.  In  common  with  all 
kinds  of  joint  stock  companies,  stock  fire  insurance 


682 

companies  are  required  to  pay  a  provincial  in- 
come tax  and  a  municipal  tax,  both  on  a  sliding 
scale,  based  upon  the  balance  of  income  derived 
from  all  sources,  and  a  trading  tax  based  upon  the 
profit  earned  from  actual  insurance  business.  The 
Aachen  and  Munich  Insurance  Company,  for  ex- 
ample, on  a  balance  of  1,940,187  marks  for  1897, 
paid  72,393  marks,  or,  roughly,  three  and  one-half 
per  cent.  In  Prussia  the  companies  are  not  sub- 
ject to  any  other  imposts  except  the  general  taxes, 
but  in  some  of  the  other  States,  as  in  Saxony  and 
in  some  of  the  small  Thuringian  States,  in  Mecklen- 
burg, etc.,  they  are  required  to  contribute  to  the 
improvement  of  fire  extinguishing  apparatus  ;  and 
in  Bavaria  a  "  competition  tax"  is  levied  to  sup- 
port the  inspection  of  risks  on  contents.  These 
taxes  are  assessed  at  a  fixed  rate,  generally  upon 
the  total  premium  income,  but  sometimes  also  upon 
the  aggregate  insurance  vrritten  in  the  State.  In 
Bavaria,  for  instance,  the  rate  is  at  present  one 
per  cent.,  which  it  is  now  proposed  to  increase  to 
three  per  cent.,  while  in  Wurtemberg,  Anhalt  and 
Saxe-Altenburg  it  is  two  per  cent,  of  the  premium 
receipts.  In  some  cases  the  companies  collect  the 
amount  of  these  taxes  direct  from  the  assured.  In 
many  of  the  German  States  there  still  exists  a 
stamp  tax,  which,  however,  in  all  cases  must  be 
borne  by  the  assured. 


683 

The  business  is  generally  effected  through  agents, 
though  it  is  also  done  direct  with  ofBices.  The  local 
agents  are,  however,  only  intermediaries,  and  are 
not  empowered  to  sign  policies.  The  companies 
are  not  responsible  for  the  acts  of  these  agents,  ex- 
cept in  Saxony. 

Commissions  in  the  German  Empire  vary  accord- 
ing to  the  quality  of  the  business,  a  higher  rate 
being  paid  for  private  dwellings  than  for  hazardous 
risks.  The  sub-agents,  as  a  rule,  receive  ten  per 
cent,  of  the  premium,  and  the  district  manager  or 
general  agent  fifteen  to  seventeen  and  one -half  per 
cent.,  or  even  more.  Those  offices  which  form  part 
of  the  "Yerband"  or  Association  of  German  Fire 
Insurance  Companies  are  bound  by  agreement  not 
to  make  any  reduction  in  rates  in  favor  of  guilds, 
unions  or  other  associations,  a  heavy  penalty  being 
incurred  in  each  case  of  infringement.  As  a  rule, 
no  commission  is  paid  to  the  assured. 

Generally,  insurance  is  taken  for  one,  Hve  or  ten 
years,  at  the  option  of  the  assured,  and  the  latter 
term  is  seldom,  if  ever,  exceeded.  In  several  Ger- 
man States  laws  exist  fixing  a  limit  to  the  period 
of  insurance,  as  in  Bavaria,  where  ten  years  is  the 
limit. 

It  is  the  custom  in  many  States  to  insert  a  clause 
in  the  policy  providing  for  the  continuance  of  the 
insurance  for  another  period  in  case  notice  of  dis- 


684 

continuance  has  not  been  served  within  a  stated 
number  of  months  before  expiration  ;  but  in  Ba- 
varia and  Baden  the  insertion  of  this  clause  is  pro- 
hibited. With  the  Public  Fire  Societies,  on  the 
other  hand,  the  insured  has  to  submit  to  the  rules 
laid  down  in  the  by-laws  governing  the  terms  of 
discontinuance. 

While  it  is  the  custom  of  the  Public  Fire  So- 
cieties to  classify  their  risks  according  to  the  old 
fashion  and  to  collect  for  each  class  a  specified 
premium,  the  private  companies  make  their  rates 
of  premium  independently  of  each  other  for  every 
risk  individually  according  to  its  nature.  Tariff 
associations  exist  only  in  Alsace-Lorraine,  and, 
for  storage  risks,  in  the  Hanseatic  towns,  the  Baltic 
cities  and  a  few  inland  cities. 

Indirect  insurance  against  risks  of  lessees  and 
danger  from  neighbors  is  not  practiced  in  Ger- 
many. The  provisions  of  the  Code  Napoleon 
touching  these  liabilities  formerly  exacted  in 
Alsace-Lorraine  are  not  now  recognized  in  their 
original  form  and  are  no  longer  enforced  in  any 
part  of  the  empire. 

Use  and  occupancy  insurance  is  now  prohibited 
in  nearly  all  the  German  States.  Hamburg,  how- 
ever, is  an  exception,  but  even  there  occupancy 
insurance  is  written  rarely  and  only  by  foreign 
companies.     While  the  insurance  of  rent  is  taken 


685 

in  Hamburg  by  a  large  number  of  home  and  for- 
eign companies,  it  is  done  only  to  a  limited  ex- 
tent. Ordinarily,  this  insurance  covers  the  loss  of 
rent  to  the  insured  caused  by  the  non-use  of  one 
or  more  parts  of  the  building  damaged  by  fire. 
Loss  of  rent  is  reimbursed  during  repairs  of  the 
premises  up  to  the  time  of  re-renting,  not  exceed- 
ing one  year.  The  premium  is  calculated  upon  the 
number  of  fire-places  in  dwellings,  and  in  storage 
warehouses,  according  to  the  number  of  firms 
occupying  them — construction,  use  and  neighbor- 
hood, of  course,  being  considered. 

On  the  other  hand,  throughout  Germany  gener- 
ally, insurance  is  permitted  and  effected  upon 
breweries  against  such  indirect  damage  as  is 
caused,  as  an  immediate  consequence  of  a  fire,  to 
their  beer  stored  in  their  cellars,  or  malt  in  the 
process  of  fermentation,  and  consequent  loss  on 
stock  from  disablement  of  refrigerators  in  their 
cellars  or  the  interruption  of  kilns.  For  this  class 
of  insurance,  however,  a  ministerial  decree  stipu- 
lates that  the  insured  shall  carry  one-fourth  of 
the  risk  as  a  co-insurer. 

In  Germany  each  company  has  its  own  officials 
for  the  adjustment  of  losses.  Fire  losses  on  build- 
ings, machinery,  etc.,  are  adjusted  by  experts.  As 
a  rule,  the  Public  Fire  Societies  allow  indemnity 
on  buildings  for  their  reconstruction,  and  pay- 


686 

ments  are  made  in  instalments  as  the  re-building 
progresses.     Private  companies  adjust  fire  damages 
upon  principles  laid   down  by  the    "Verband," 
which  are  based  upon  the  general  conditions  of  in- 
surance as  indicated    by  the  experience  of    the 
eighteen  companies  comprising  the  Union.     Com- 
pensation is  allowed  only  for  actual  damage  fixed 
according  to  the  value  of  the  property  at  the  time 
of  the  fire.     The  insurance  itself  does  not  consti- 
tute a  proof  of  the  existence  or  value  of  insured 
objects  at  the  time  of  fire,  and  the  amount  of  the 
insurance  only  represents  the  limit  of  the  liability 
of  the  company  for  indemnification.     Numerous 
and  strict  requirements  are  imposed  upon  the  as- 
sured.    Among  others,  he  is  bound  to  save  every- 
thing within  his  power  in  case  of  fire,  and  to  serve 
notice  upon  the  agent  within  twenty-four  hours, 
and  the  police  board  within  three  days,  of  the  oc- 
currence.    He  may  be  required  on  demand  of  the 
company  to  furnish  lists  of  goods  existing  at  the 
time  of  the  fire,  those  burned  or  lost  and  those 
saved,  damaged  or  undamaged,  with  itemized  val- 
uations.    If  the  insured  acts  in  contravention  of 
certain  directions,  indemnity  is  forfeited.     In  the 
adjustment  the  company  is  not  bound  to  deal  with 
anyone  but  the  insured,  but  differences  may  be 
submitted  to  an  umpire  satisfactory  to  both  par- 
ties.    If  an  umpire  cannot  be  agreed  upon,  he  may 


687 

be  appointed  by  the  district  court  of  the  place  in 
which  the  fire  occurred.  The  indemnity  is  to  be 
paid  in  cash  within  one  month  after  the  total 
amount  has  been  ascertained,  and  the  company  is 
bound  to  pay  interest  from  the  date  of  expiration 
of  the  above  thirty  days.  Claims  for  indemnity 
which  have  not  been  recognized  in  writing  by  the 
company  or  covered  by  an  action  before  a  compet- 
ent court  and  notification  of  the  same  within  six 
months  of  the  fire,  become  extinct  by  the  mere 
lapse  of  said  term. 

Mortgage  creditors  are  protected  by  both  public 
and  private  insurance  companies. 

German  policies  invariably  include  the  co-insur- 
ance clause.  It  generally  reads  as  follows:  *'If 
the  value  of  the  insured  property  at  the  time  of 
the  fire  exceeds  the  amount  insured  thereon,  or  if 
the  said  property  is  also  insured  elsewhere,  the 
loss  will  be  made  good  pro  rata." 

Thirty  stock  companies  engaged  in  the  fire  in- 
surance business  in  G-ermany  on  the  thirty-first  of 
December,  1896,  possessed  subscribed  capital  ag- 
gregating $39,118,127,  of  which  $9,233,253  were 
paid  up.  The  assets  of  twenty-eight  ot  these 
companies — of  two  the  amount  of  their  assets  was 
not  obtained — aggregated  $78,793,718,  and  the  lia- 
bilities of  twenty-five,  of  which  the  figures  were 
secured,  amounted  to  $41,148,276. 


A  resume  of  the  business  of  twenty-nine  of  these 
companies  for  a  single  year,  1896  and  1897  (for  a 
few  companies  it  was  not  feasible  to  get  their  busi- 
ness for  the  year  1896,  so  that  of  1897  was  taken), 
shows  their  aggregate  reserve  for  capital  $11,154,- 
699  ;  for  re-insurance,  $10,252,506  ;  for  losses,  $1,- 
637,374  ;  risks  written,  $13,823,148,656  f  gross  pre- 
miums received,  $27,774,623  ;  net  premiums,  $14,- 
698,166  ;  net  fire  losses,  $8,537,261. 

FEANCE. 

In  France  insurance  companies,  as  well  as  all 
other  joint  stock  companies,  may  be  organized 
without  the  special  permission  of  the  government. 
Besides  complying  with  the  general  rules  for  the 
formation  of  joint  stock  companies,  they  are  also 
subject  to  the  requirements  of  the  decree  of  Janu- 
ary 22,  1868.  According  to  this  decree,  a  com- 
pany is  considered  established  when  at  least 
60,000  francs  of  the  subscribed  capital  have  been 
paid  up.t    Mutual  companies  may  be  established, 


*The  amount  of  risks  written  was  not  reported  for  six  companies. 
In  order  that  the  total  amount  might  be  approximately  correct,  I 
have  estimated  the  figures  for  the  delinquent  companies  at  the  aver- 
age rate  of  premium  for  the  companies  whose  figures  are  given,  and 
have  included  them  in  the  total  amount. 

f  A  company  can  have  unlimited  subscribed  capital,  but  it  must 
have  paid  up  at  least  three- fourths  of  the  amount  subscribed,  which 
must  not  be  less  than  50,000  francs. 


689 

according  to  the  same  decree,  by  an  authentic  act 
or  by  agreement  under  private  seal.  By-laws 
have  to  be  drawn  up,  and  the  signers  must  attest 
them  before  a  notary.  An  abstract  of  the  act  of 
establishment  must  be  published  in  certain  desig- 
nated journals,  and  copies  of  these  journals  and  of 
the  act  of  establishment  must  be  deposited  with  the 
civil  court  at  the  seat  of  the  head  office  of  the 
company  within  three  months  after  the  organiza- 
tion. 

Stock  insurance  companies  are  required  to  set 
aside  annually  twenty  per  cent,  of  their  profits  for 
the  formation  of  a  reserve  fund  until  it  amounts  to 
one-fifth  of  the  capital.  Mutual  companies  must 
maintain  a  guarantee  fund,  to  which  a  yearly  max- 
imum of  contribution  is  fixed  by  a  tariff,  and  a  re- 
serve adjusted  every  five  years.  A  maximum  for 
their  annual  expenses  of  administration  is  also 
fixed  by  statute.  Every  policy  of  a  stock  com- 
pany must  show  the  amount  of  the  subscribed  and 
paid-up  capital. 

The  assets  of  both  stock  and  mutual  concerns 
must  be  invested  in  first-class  securities,  of  certain 
categories  prescribed  by  law,  consisting  princi- 
pally of  bonds  of  the  public  debt,  municipal  stock 
and  railway  shares  enjoying  a  government  guaran- 
tee. 

Foreign  companies  are  permitted  to  transact  busi- 


690 

ness  fn  France  on  the  same  terms  as  liome  com- 
panies. They  are  admitted  under  a  decree  of  the 
Ministry,  which  requires,  besides  the  reciprocity  of 
the  respective  governments,  the  appointment  of  a 
responsible  representative,  a  citizen  of  France,  who 
assumes  the  guarantee  for  the  payment  of  taxes 
and  the  observance  of  eventual  government  regula- 
tions. 

A  projected  law  regarding  foreign  companies,  fol- 
lowing principally  the  chief  points  of  the  most 
recent  Austrian  requirements,  is  soon  to  be  sub- 
mitted to  the  legislative  assembly. 

Insurance  companies,  domestic  and  foreign,  are 
required  to  furnish  an  annual  statement  to  the 
government  showing  the  total  amount  of  insurance 
in  force  and  the  premiums  received,  for  the  purpose 
of  taxation.  The  registration  department  is  author- 
ized to  examine  the  books  of  a  company,  in  order 
to  verify  the  figures  given  in  this  return,  which 
comprises  the  extent  of  government  control  and 
investigation. 

In  France  a  stamp  tax  is  charged  on  policies,  cer- 
tificates of  renewal  and  additions.  The  companies 
meet  this  liability  by  an  annual  payment,  namely : 
stock  companies  of  four-tenths  franc  per  thousand 
and  mutuals  of  three-tenths  franc  per  thousand  of 
the  total  insurance.  Re-insurance  is  exempt  from 
this  annual  tax,  if  paid  by  the  insurer.     Avoiding 


691 

this  lax  subjects  the  offender  to  a  fine  ot  from 
500  to  5,000  francs.  Companies  are  also  re- 
quired to  pay  a  registration  fee  of  ten  per 
cent,  on  the  balance  of  premium  income  on 
domestic  business  after  deducting  premiums  paid 
for  re-insurance.  These  taxes  are  invariably 
charged  to  and  paid  by  the  assured,  in  addition 
to  the  premium  stipulated  for  in  the  policy. 
An  industrial  tax  is  also  imposed  upon  both 
mutual  and  stock  companies  of  100  francs  for 
each  department  of  France  in  which  the  company 
operates,  and  they  are  also  required  to  pay  a  tax  on 
the  value  of  their  general  agents'  office  furniture 
and  fixtures.  There  is  also  a  stamp  tax  on  shares 
of  one-half  of  one  per  cent,  payable  by  companies 
less  than  ten  years  old,  and  of  one  per  cent,  by 
those  of  greater  age.  Upon  indorsement  and  con- 
version of  shares  a  stamp  tax  is  due  of  one -half  of 
one  per  cent,  of  the  value  negotiated  after  deduct- 
ing the  assessment  to  be  paid.  Dividends  are 
taxed  four  per  cent.  During  the  fifteen  years, 
from  1879  to  1893,  the  French  joint-stock  com- 
panies paid  to  the  government  taxes,  fees  and  fines 
amounting  to  221,474,040  francs.  They  paid  to 
their  shareholders  in  the  same  period  183,922,093 
francs. 

Up  to  the  present  time  insurance  companies  in 
France  have  not  been  compelled  by  law  to  con 


692 

tribute  to  the  support  of  fire  brigades.  A  bill  has, 
however,  been  recently  passed  in  the  Chamber  of 
Deputies,  and  sanctioned  by  the  Senate,  by  which 
insurance  companies  will  be  required  hereafter  to 
pay  a  tax  of  six  francs  per  thousand  francs  insured, 
for  the  purpose  of  providing  a  superannuation  and 
casualty  fund  for  firemen. 

There  are  no  special  laws  in  France  relating  to 
fire  inquests,  yet  an  inquiry  by  the  police  is  made 
into  every  fire  in  towns,  and  in  the  country  districts 
by  the  gendarmerie. 

The  responsibility  of  a  landlord  or  tenant  for  any 
loss  or  damage  by  fire,  caused  by  his  action  or 
negligence,  is  a  principle  enforced  by  the  Code  Na- 
poleon, which  prevails  especially  in  France  and 
Belgium,  and  under  which  the  liability  for  the  loss 
is  imposed  upon  him  through  whose  fault  it  had 
been  occasioned.  Under  this  law  of  ''Risque  Lo- 
catif  "  the  presumption  is  that  the  fire  was  caused 
by  the  act  or  neglect  of  the  tenant,  and  the  onus  of 
proof  rests  upon  him  to  show  that  it  originated 
from  some  structural  defect  or  from  some  cause  be- 
yond his  control  before  the  landlord  can  be  held 
responsible.  A  tenant,  therefore,  must  suffer  not 
only  the  loss  occasioned  to  his  own  property,  but 
likewise  that  caused  to  his  landlord's  as  well  as  to 
his  neighbor's,  by  a  fire  originating  in  his  (the  ten- 
ant's) own  premises,  unless  he  can  prove  to  the 


693 

satisfaction  of  a  conrt  of  law  that  the  accident  was 
occasioned  by  some  defect  in  the  building  or  from 
some  other  cause  over  which  he  had  no  control,  in 
which  event  the  entire  loss,  both  on  building  and 
contents  and  for  damage  done  to  neighbor's  prop- 
erty, falls  upon  the  owner  of  the  building  in  which 
the  fire  originated. 

Thus,  Section  1382  of  the  Code  Napoleon  says : 
^*  Every  person  is  personally  responsible  and  liable 
for  any  acts  of  his  by  which  any  other  person  has 
or  may  have  sustained  any  loss,  damage  or  injury." 
Section  1383  says  that  ''every  person  is  responsi- 
ble for  any  loss,  damage  or  injury  caused  by  his 
own  act,  carelessness  or  negligence." 

Accordingly,  a  tenant  usually  insures  by  one 
policy  the  following  items  :  1.  His  own  property  ; 
2.  The  "risque  locatif  " — the  risk  of  responsibil- 
ity for  damage  to  the  building;  3.  ''Eecoursdes 
voisins  " — the  risk  of  responsibility  for  damage 
to  property  of  his  neighbors.  A  landlord  insures 
in  one  policy  the  following  items :  1.  His  own 
property;  2.  The  "  Recours  des  locataries  " — his 
responsibility  for  damage  to  the  property  of  ten- 
ants ;  and  3.  ''  Recours  des  voisins  " — his  respon- 
sibility for  damage  to  the  property  of  his  neigh- 
bors. 

Though  there  is  no  statute  specially  regulating 
fire  insurance  contracts  in  France — such  contracts 


694 

being  subject  to  the  articles  of  the  Code  Napoleon 
which  relate  to  all  contracts — a  co-insurance  clause 
is  obligatory  in  all  policies,  except  when  by  special 
decision  of  the  "Comite"  or  "Syndicate" — the 
two  tariff  organizations — it  is  dispensed  with  in  in- 
dividual cases.  This  clause  says  :  "  If  it  is  estab- 
lished that  at  the  time  of  any  fire  the  value  of  the 
property  insured  by  any  item  of  the  policy  exceeds 
the  amount  insured  thereon,  the  insured  is  his  own 
insurer  for  the  difference,  and  bears  as  such  a 
proportionate  share  of  the  loss." 

Fire  insurance  rates  are  usually  fixed  at  a  meet- 
ing of  one  or  the  other  of  the  two  tariff  associations 
— the  "Comite"  consisting  of  three  companies, 
and  the  ' '  Syndicate ' '  consisting  of  six,  and  any 
decision  of  one  is  immediately  adopted  by  the 
other.  Each  association  publishes  a  general  tariff 
with  regulations,  etc.,  but  the  terms  in  both  are 
identical.  There  is  also  a  syndicate  of  mutual 
companies,  chiefly  for  non-hazardous  business. 
Their  tariff  is  the  same  as  that  of  the  other  com- 
panies, subject  to  twenty  per  cent,  deduction  Irom 
all  rates. 

In  Paris  insurance  business  is  effected  directly 
with  the  ojffices  or  by  means  of  a  broker.  In  the 
provinces  It  is  conducted  always  through  local 
agents.  There  is  no  tariff  regulation  on  the  sub- 
ject of  commissions.     Policies  are  generally  issued 


for  a  period  of  ten  years,  and  the  premium  is  paya- 
ble by  annual  instalments.  On  such  contracts  the 
commission  allowed  is  usually  discounted  in  whole 
or  in  part.  Policies  are  drawn  either  with  or  with- 
out the  clause  giving  either  party  tlie  right  to  ter- 
minate the  contract  at  the  end  of  any  year,  but  it 
is  generally  omitted. 

Short-period  policies  are  issued  for  three-fourths 
of  the  annual  rate  for  nine  months,  half  the  annual 
rate  for  six  months,  and  one-fourth  the  annual  rate 
for  three  months  and  under.  The  insurance  in  no 
case  begins  immediately  after  the  signing  of  a 
policy  and  the  payment  of  the  premium,  but  on 
the  following  day,  except  in  the  case  of  mercantile 
insurances,  where  provision  is  made  by  a  special 
clause  for  the  immediate  commencement  of  the 
insurance. 

Any  concealment  or  misrepresentation  designed 
to  make  the  risk  appear  more  favorable  than  it  is, 
according  to -Article  348  of  the  ''Code  de  Com- 
merce," invalidates  the  insurance  without  the  re- 
turn of  premium.  If  for  any  reason  the  insurance 
is  abrogated  in  part,  or  wholly,  or  becomes  void 
by  the  sale  or  transfer  of  the  property,  the  un- 
earned premium  under  usages  in  France  is  in  most 
cases  forfeited  to  the  insuring  company. 

In  case  of  fire  the  assured  is  bound  to  make  a 
declaration  immediately,  before  a  justice  of  the 


696 

peace,  at  his  own  expense,  giving  the  date  of  the 
occurrence  of  the  fire,  its  probable  cause  and  any- 
other  accompanying  circumstances,  and  send  a 
certified  copy  thereof  without  delay  to  the  general 
agent  of  the  insurance  company. 

In  the  adjustment  of  a  loss  two  assessors  are 
appointed,  one  by  the  assured  and  one  by  the 
company.  The  latter  is  usually  a  professional  ex- 
pert, but  the  insured's  nominee  is  often  a  builder, 
engineer,  or  some  one  having  a  special  knowledge 
of  the  property  destroyed.  If  the  assessors  disa- 
gree as  to  the  amount  of  the  damage  they  nomi- 
nate a  referee,  who  is  agreed  upon  by  both,  if 
possible  ;  but  if  not,  he  is  nominated  by  a  tribunal 
of  justice.  Neither  the  award  of  the  assessors  nor 
of  the  referee  is  binding,  but  is  merely  regarded  as 
prima  facie  proof  of  the  amount  of  the  loss. 
When  several  companies  are  interested,  the  adjus- 
ter is  usually  selected  by  mutual  agreement,  but 
in  most  cases  the  wishes  of  the  companies  hav- 
ing the  largest  interests  are  deferred  to  by  the 
others. 

France  has  two  old  established  departmental  in- 
stitutions (Caisses  Departmentales)  which  transact 
fire  insurance  business,  one  in  the  Department  of 
the  Somme,  and  the  other  in  that  of  the  Marne. 
Recent  attempts  to  extend  this  practice  to  other 
Departments  have  been  declared  illegal. 


697 

In  the  year  1897  there  were  thirty-five  mutual 
associations,  twenty-one  joint-stock  companies,  and 
one  small  re-insurance  company  transacting  the 
business  of  fire  insurance  in  France.  The  twenty- 
two  stock  companies,  with  a  total  pa;id-up  capi- 
tal of  $13,820,000,  received,  in  1897,  $20,530,771 
in  net  premiums,  and  paid  $9,687,115  in  losses,  and 
$7,168,146  for  general  expenses  and  commissions. 
They  distributed  to  stockholders  by  way  of  divi- 
dends $3,472,167.  The  business  of  these  companies 
for  that  year,  therefore,  shows  an  average  percent- 
age of  losses  to  premiums  of  47.1,  and  an  average 
percentage  of  expenses  and  commissions  of  34.9. 

BELGIUM. 

No  particular  concession  is  required  for  the 
transaction  of  the  business  of  insurance  in  Bel- 
gium, nor  is  there  a  special  insurance  department. 
The  ordinary  tax  authorities  are  charged  with  the 
control  of  insurance  matters. 

There  is  no  law  limiting  the  minimum  amount  of 
subscribed  capital  for  fire  insurance  companies,  but 
the  paid-up  capital  must  be  at  least  ten  per  cent, 
of  the  subscribed  capital.  According  to  an  article 
of  the  Code  of  Commerce,  the  annual  statement  of 
companies  is  to  be  published  to  avoid  punishment. 
This  must  show  the  profits  arising  from  Belgian 
business. 


Foreign  companies  are  allowed  to  transact  busi- 
ness on  the  same  terms  as  native  companies. 
Those,  however,  which  have  commenced  operations 
in  the  kingdom  since  1873  must  publish  an  abstract 
of  their  deed  of  settlement  in  the  Moniteur  Belge^ 
an  official  journal,  and  must  also  publish  any  alter- 
ations in  the  same  as  they  may  occur. 

Fire  insurance  companies  have  to  pay  various 
taxes  on  their  Belgian  profits,  amounting  to  slightly 
over  three  and  one-half  per  cent,  on  thfi  total 
amount  of  profit.  The  authorities  of  the  town  of 
Liege  levy  a  further  tax  of  two  and  one-half  per 
cent,  on  the  profits  realized  in  that  town. 

Fire  insurance  is  not  undertaken  in  Belgium  by 
the  Government  or  by  any  municipality,  and  there 
are  no  special  laws  relating  to  fire  inquests. 

Companies  are  not  compelled  by  law  to  contrib- 
ute to  the  support  of  fire  departments,  but  it  is 
customary  to  make  gratuitous  payments  to  fire  bri- 
gades when  they  have  rendered  efficient  services. 

The  fire  insurance  contract  is  regulated  by  the 
law  of  June  11,  1874. 

The  general  policy  conditions  are  similar  to  those 
of  France.  The  following  is  the  co-insurance 
clause  obligatory  in  all  policies:  '*If  it  appears 
from  the  valuation  made  after  a  fire  that  the.  value 
of  the  objects  insured  was  greater  at  the  time  of 
the  fire  than  the  amount  insured  thereon,  the  in- 


699 

sured  is  his  own  insurer  for  the  surplus  and  sup 
ports  as  such  a  ratable  share  of  the  loss." 

The  Code  ]N  apoleon  prevails  in  Belgium  ;  so  that 
the  law  and  practice  touching  the  liability  for  dam- 
age to  neighbors'  property  or  to  a  landlord's  prop- 
erty by  a  tenant  are  the  same  as  in  France,  except 
that  in  Antwerp  on  mercantile  business  an  extra 
premium  is  charged  on  each  policy,  in  considera- 
tion of  which  there  is  an  all-round  waiver  of  rights 
of  recourse  against  landlords,  tenants  and  neigh- 
bors. 

The  Comite  Beige  publishes  a  tariff  applicable  to 
all  risks  in  the  kingdom,  except  mercantile  risks 
at  Antwerp.  For  these  risks  there  are  two  sepa- 
rate tariffs,  not  differing  materially  from  each 
other.  One  is  issued  by  the  Belgian  Committee 
and  the  other  by  the  Committee  of  Foreign  Com- 
panies represented  at  Antwerp. 

Fire  insurance  business  in  Antwerp  and  Brussels 
is  generally  conducted  through  brokers  ;  in  other 
towns  through  local  agents.  Very  little  business  is 
done  with  offices  direct. 

The  commission  paid  is  usually  twenty  per  cent. 
The  General  Tariff  issued  by  the  Belgian  Commit- 
tee contains  a  provision  forbidding  the  payment  of 
any  commission  to  the  insured. 

Policies  are  generally  written  for  ten  years,  the 
premiums    being   payable    annually    in    advance. 


700 

For  mercantile  business,  policies  are  written  for  the 
usual  short  periods.  The  short  term  rates  under 
the  general  tariff  are  as  follows :  For  six  months, 
simple  risks,  two-thirds  the  annual  rate,  stock  in 
factories,  three-fourths ;  three  months  or  under, 
simple  risks,  one-third ;  stock  in  factories,  one- 
half.  There  is  also  an  elaborate  short-term  tariff 
for  Antwerp  mercantile  business. 

Losses  are  adjusted  by  professional  assessors. 
When  several  companies  are  interested  in  a  loss 
the  lead  is  usually  taken  by  the  one  insuring  the 
largest  amount. 

There  are  twenty  three  native  private  fire  insur- 
ance companies  of  importance  in  Belgium,  at  the 
head  of  which  is  the  Compagnie  des  Proprietaires 
Reunies.  Competition  is  sharp  in  Antwerp,  where 
forty-three  fire  insurance  companies  are  operating. 
In  the  year  1896  there  were  twenty- two  native  Bel- 
gian companies,  with  an  aggregate  subscribed  capi- 
tal of  $10,170,079,  of  which  $3,194,957  were  paid  in, 
and  twenty-one  of  these  companies  received  in  total 
premiums  $7,436,419,  of  which  $829,890  were  re-in- 
sured, while  they  paid  in  total  net  losses  $3,854,- 
798.  The  cost  of  conducting  the  business,  includ- 
ing commissions,  amounted  to  $2, 041*,  327.  The 
profit  for  the  year  was  $710,404,  and  the  dividends 
paid  amounted  to  $357,363. 


701 


SWITZERLAND. 


The  Federal  law  of  June  25, 1885,  conferred  upon 
the  twenty-five  cantonal  governments  forming  the 
Republic  of  Switzerland  the  power  to  grant  or  re- 
fuse concessions  for  the  transaction  of  the  busi- 
ness of  insurance  and  placed  the  decision  of  ques- 
tions germane  thereto  in  the  hands  of  the  Federal 
Council,  and  in  order  to  be  able  to  transact  busi- 
ness in  Switzerland  insurance  companies  must  first 
obtain  the  permission  of  this  Federal  Council. 

Though  native  insurance  companies  are  not  re- 
quired to  make  a  deposit  nor  submit  to  a  limit  for 
the  minimum  amount  of  capital,  the  home  stock 
companies  must  give  information  of  the  number 
and  the  capital  of  their  subscribed  shares,  how 
much  thereof  is  paid  up,  and  what  requirements 
exist  as  to  the  further  liability  of  the  stockholders. 
Mutual  companies  must  state  whether  a  founda- 
tion fund  exists  and  with  what  limitations, 
whether  the  assured  or  insurer  is  liable  for  the 
losses  in  the  year's  account  and  to  what  extent. 
They  must  also  state  the  principles  practiced  for 
reckoning  the  premium  reserve  and  for  providing 
for  pending  claims  They  must  likewise  present 
statistical  statements,  tariffs  prospectuses,  etc., 
for  the  preceding  year. 

Foreign   companies  have  to  furnish  proof  that 


702 

they  transact  business  at  the  places  where  their 
home  offices  are  located  in  their  own  name  and 
right,  and  are  empowered  to  make  contracts.  They 
must  select  a  chief  domicile  in  Switzerland,  and 
appoint  a  general  manager  and  submit  a  copy  of 
his  certificate  of  authority.  They  are  also  required 
to  make  a  deposit  of  60,000  francs,  or,  say,  $12,000, 
before  commencing  operations.  Otherwise,  govern- 
ment supervision  of  foreign  companies,  which  is  in 
all  cases  exercised  by  the  ''  Bureau  Federal  des  As- 
surances," is  the  same  as  of  native  organizations. 

Every  insurance  company  is  required  to  furnish 
annually  a  report  of  its  operations  on  a  special 
form,  giving  full  details  of  the  business  transacted 
during  the  preceding  twelve  months. 

The  Federal  Council  imposes  a  tax  of  one  per 
cent,  on  the  premiums  received  in  Switzerland.  In 
addition,  the  town  authorities  in  Geneva  levy  a 
further  tax  called  a  "  Patente."  Most  of  the 
cantons  also  impose  a  tax  of  so  much  per  1,000 
francs  insured  for  the  maintenance  of  fire  brigades. 

There  is  at  present  no  special  law  regulating  the 
fire  insurance  contract,  though  one  is  in  course  of 
preparation.  The  provisions  of  the  common  law 
apply.  To  each  canton,  however,  is  reserved  the 
right  by  the  Federal  law  to  impose  certain  forms 
of  wording  in  policies,  which  also  carries  a  certain 
control  over  the  policies  in  force  or  to  be  issued. 


703 

The  general  conditions  under  which  insurance  is 
written  do  not  differ  in  substance  from  those  in 
use  in  Germany.  The  fundamental  principle  that 
insurance  should  lead  to  no  profit  to  the  assured  is 
upheld  by  private  as  well  as  by  government  institu- 
tions. Since  the  great  fire  of  Glarus  full  indemnity 
has  been  guaranteed  by  almost  all  the  companies, 
not  only  upon  contents,  but  also  upon  buildings. 
Insurance  policies  contain  the  usual  co-insurance 
clause,  that  is,  that  the  insured  is  considered  his 
own  insurer  where  the  property  is  covered  for  less 
than  its  value.  It  is  not  usual  to  cancel  the  co-in- 
surance clause,  but  its  retention  is  not  obligatory 
except  in  Freiburg,  Appenzell  and  Glarus. 

The  insurance  for  a  tenant's  liability  for  losses 
arising  from  his  negligence  to  his  landlord's  or  to 
his  neighbor's  property  is  not  customary  in 
Switzerland.  Contrary  to  French  law,  the  onus  of 
proof  of  the  cause  of  the  fire  is  thrown  on  the 
landlord. 

Police  investigation  of  fires  is  the  rule.  In  cases 
where  fires  are  the  result  of  carelessness,  indemnity 
is  denied  in  some  cantons  wholly  and  in  others  in 
part.  Two  cantons  impose  fines  only  for  such 
carelessness,  and  only  one  canton  is  wholly  silent 
upon  this  point.  The  laws  of  the  various  cantons 
contain  very  strict  provisions  against  insurance 
fraud. 


704 

The  business  of  fire  insurance  is  usually  con- 
ducted by  local  agents.  The  rate  of  commission 
varies  with  the  different  companies,  between  ten 
and  twenty  per  cent,  of  the  premium,  and  is  paid 
during  the  entire  life  of  the  contract. 

Policies  are  generally  issued  for  several  years  at 
a  time,  and  it  is  becoming  usual  to  insert  a  clause 
to  the  effect  that,  failing  notice  to  the  contrary 
from  either  side,  a  long-term  policy  is  replaced 
automatically  on  its  expiration  by  another  similar 
contract  of  like  duration.  Premiums  are  payable 
annually.  There  is  no  tariff  association  of  any 
kind.  Each  company  is  free  to  fix  its  own  rates. 
No  general  rule  prevails  as  to  what  proportion  of 
the  annual  rate  shall  be  paid  for  short-period  poli- 
cies. A  number  of  the  companies  follow  tlie  French 
custom,  viz.:  Over  six  and  up  to  nine  months, 
three-fourths  ;  over  three  and  up  to  six  months, 
one-half  ;  three  months  and  under,  one-fourth. 

Fire  losses  in  Switzerland  are  usually  adjusted 
by  professional  assessors.  As  a  general  rule,  one 
office  takes  charge  of  the  settlement,  but  there  is 
no  recognized  standard  as  to  procedure  in  such 
cases. 

Besides  four  fire  insurance  companies,  there  are 
in  Switzerland  seventeen  cantonal  institutions, 
which  insure  buildings,  and  two  which  insure  con- 
tents only.    These  cantonal  insurance  departments 


706 

are  under  the  management  of  the  local  authorities, 
and  insurance  in  them  is  usually  obligatory.  Of 
the  private  insurance  institutions,  two  are  stock 
companies,  namely,  the  Helvetia,  organized  in  St^ 
Gall  in  the  year  1861,  and  the  Baloise,  organized  in 
the  city  of  Basle  in  1863.  Each  of  these  has  a  paid 
up  capital  of  2,000,000  francs  and  conducts  a  large 
foreign  business.  In  1895  the  net  premium  receipts 
of  the  Helvetia  aggregated  3,459,123  francs,  about 
$667,610  ;  of  the  Baloise,  2,837,596  francs,  or  about 
$547,656. 

ITALY. 

Insurance  companies  desiring  to  operate  in  Italy, 
besides  fulfilling  the  conditions  of  the  commercial 
laws,  must  submit  to  the  Minister  of  Agriculture, 
Commerce  and  Industry,  for  the  purpose  of  official 
publication,  an  abstract  of  the  different  policy 
forms  and  insurance  conditions  which  they  intend  to 
use ;  also  of  the  system  upon  which  their  premium 
reserves  are  calculated.  Further,  for  the  protection 
of  the  assured  each  company  must  make  a  deposit 
of  100,000  lire  (about  $19,000)  for  each  branch  of 
insurance  to  be  conducted.  This  can  be  returned 
to  it  only  when  all  obligations  to  the  assured  are 
fulfilled.  The  repayment  follows  through  a  decree 
of  the  Minister. 

The  companies  have  to  set  aside  annually  at  least 


706 

one-twentieth  of  the  net  premium  income  for  the 
formation  of  a  reserve  fund  until  it  reaches  a  fixed 
limit. 

Annually  a  financial  statement,  according  to  a 
certain  prescribed  form,  also  the  other  documents 
described  in  Article  120  of  the  Commercial  Code, 
are  to  be  presented.  A  judicially  authenticated 
certificate  concerning  the  deposit  made  must  be 
added.  Insurance  companies  are  subject  to  the 
supervision  of  the  said  Minister,  who  is  required 
and  empowered  to  take  all  measures  necessary  to 
secure  from  the  companies  the  fulfillment  of  their 
obligations  to  their  assured.  The  Minister  checks 
the  annual  statements  submitted  and  ascertains 
whether  they  agree  with  the  company's  records, 
and  whether  the  premium  reserves  are  computed  in 
accordance  with  the  prescribed  methods.  Every 
five  years  a  general  inspection  of  all  the  companies 
has  to  be  undertaken  by  the  Minister.  The  ex. 
penses  attending  such  examinations  fall  upon  the 
companies.  Fines  of  from  500  to  5,000  lire  (about 
$100  to  $1,000)  are  imposed  by  the  court  upon  the 
demand  of  the  Minister  for  the  transgression  of  any 
statutory  requirement. 

Foreign  companies  must  submit  to  the  prescrip- 
tions of  the  Commercial  Code  and  the  provisions  of 
special  laws,  and  are  required  to  appoint  general 
agents  who  must  reside  in  Italy,  in  order  to  trans- 


707 

act  the  business  of  the  companies  and  defend  their 
rights.  The  authority  of  the  general  agent  must 
be  published. 

Every  foreign  company  is  required  to  publish  an- 
nually a  special  financial  statement  concerning  its 
operations  in  the  Kingdom  of  Italy,  according  to  a 
specified  form.  As  soon  as  a  foreign  company  goes 
into  liquidation  or  becomes  bankrupt,  or  when  it 
has  given  up  the  domicile  of  its  general  agent  in  the 
country,  or  when  it  has  not,  in  the  course  of  two 
months  submitted  to  the  instructions  given  to  it  by 
the  Minister,  according  to  law,  the  Minister  is  re- 
quired to  take  the  consequent  necessary  measures 
in  the  civil  court  of  the  district  in  which  the  office 
of  the  company  or  its  general  agent  has  its  location, 
for  the  appointment  of  a  receiver  as  defender  of 
the  assured  in  the  kingdom.  The  managers  and 
representatives  of  the  foreign  companies  are  subject 
to  the  same  fines  as  those  of  the  native  institutions. 
Special  agents  who  are  not  subject  to  the  aforesaid 
fines  may  be  punished  by  a  fine  of  from  100  to  500 
lire  for  each  offense.  The  legal  prescriptions  apply 
to  insurance  written  in  Italy.  All  the  aforesaid 
publications  for  insurance  companies  must  be  pub- 
lished in  an  official  paper. 

In  the  year  1896  there  were  only  four  native  stock 
fire  insurance  companies  in  operation,  since  the 
"Italia"  had  given  up  its  fire  insurance  branch. 


708 

On  the  other  hand,  the  number  of  mutual  com- 
panies had  risen  to  forty -five.  The  leading  place 
among  the  first  named  companies  is  taken  by  the 
*'  Compagnia  di  Milano,"  not  as  respects  the 
amount  of  business  transacted,  but  as  to  its  qual- 
ity. The  only  company  worthy  of  mention  among 
the  mutual  companies  is  the  "Reale  Mutua,"  of 
Turin,  organized  in  1828,  which  enjoys  a  consider- 
able premium  income  and  is  strict  in  the  selection 
of  its  risks.  The  remaining  mutual  companies  are 
wholly  unimportant  and  supply  no  real  relief  to 
the  people. 

The  number  of  foreign  companies  operating  in 
Italy  is  nine.  At  their  head  stand  the  Austrian 
companies,  '' Assicurazioni  Generali"  and  '^Riun- 
ione  Adriatica  di  Sicurta,"  both  of  Trieste. 

The  character  of  the  Italian  business  is  one  rich 
in  losses.  The  cancerous  affections  are  the  little 
fires.  In  January,  1896,  the  losses  on  even  com- 
mercial risks  were  so  burdensome  upon  the  com- 
panies, by  reason  of  the  increased  frequency  of 
fires,  that  a  -rule  was  enacted  by  the  Concordat 
(Tariff  Association)  requiring  the  assured  to  carry 
one-tenth  of  the  risk  in  co-insurance,  and  which 
seemed  to  be  fully  justified.  Greater  rigor  in  the 
adjustment  of  losses  was  ordered. 

On  risks  rated  up  to  four  per  cent,  the  commis- 
sion is  discounted  on  ten-year  contracts,  the  average 


709 

rate  of  commission  being  100  per  cent,  upon  the 
first  instalment,  with  twelve  to  fifteen  per  cent,  on 
renewals.  An  annual  commission  of  twenty  per 
cent,  is  paid  on  other  business.  Commission  may 
be  paid  to  the  assured. 

The  ordinary  insurance  conditions  afford  no  occa- 
sion for  special  comment.  It  is  expressly  empha- 
sized therein  that  insurance  should  lead  to  no  profit 
to  the  assured,  and  that  only  the  actual  loss  sus- 
tained should  be  made  good.  Indemnity  is  granted 
against  the  responsibility  of  tenants  under  Articles 
1689  and  1590,  against  neighbor's  recourse,  under 
the  provision  of  Articles  1151,  1152,  and  1153 ;  as 
also  the  recourse  of  tenants  against  the  landlord, 
upon  the  principles  of  Articles  1151, 1152,  1155  and 
1157  of  the  Italian  Civil  Code,  in  addition  to  fire 
insurance  proper,  for  which  an  additional  premium 
is  charged,  and  similar  to  the  rules  prevailing  in 
France.  The  objects  insured  against  fire  are  like- 
wise covered  against  loss  by  lightning,  explosion 
of  illuminating  and  heating  gas  and  of  steam  ap- 
paratus, at  a  proportionate  extra  premium. 

The  co-insurance  clause  is  mandatory. 

Policies  and  notices  of  change  do  not  go  into 
effect  until  noon  of  the  day  following  the  date  of 
the  policy  or  indorsement. 

The  short-term  scale  is  as  follows  : 

Nine  months,  three-quarters  of  the  annual  rate  ; 


710 

six    months,   one-half  of  the  annual  rate ;  three 
months  and  under,  one  quarter  of  the  annual  rate. 

Heirs  and  trustees  are  required  by  law  to  main 
tain  insurance  on  the  property  in  which  they  are 
interested  and  are  liable  for  the  payment  of  pre- 
miums. On  the  sale  or  gift  of  insured  property  the 
assured  is  required  to  notify  the  new  owner  of  his 
obligation  to  maintain  the  insurance  and  must  pay, 
besides  the  premium  falling  due,  one  additional 
annual  premium  as  indemnification.  Insurances 
under  annual  policies  are  always  to  be  renewed  for 
the  same  period  if  previous  notice  be  not  served 
within  at  least  six  months  by  one  or  both  of  the 
contracting  parties. 

The  assured  has  to  bear  the  stamp  and  other 
taxes,  and  especially  all  present  and  future  imposts 
relating  to  the  insurance  contract,  as  also  the  rela- 
tive money  fines,  if  any. 

The  Union,  as  a  tariff  association,  is  looked  to 
for  the  mutual  covering  of  commercial  risks.  To 
this  belong  the  Italian  and  prominent  foreign  stock 
fire  insurance  companies  operating  in  the  country. 
Insurance  has  received  much  benefit  through  this 
means,  especially  as  regards  commercial  business. 

The  new  law  concerning  insurance  taxation  lays 
heavier  burdens  upon  the  insurance  industry 
than  are  prescribed  in  most  countries  in  Europe. 
Every  premium  payment  for  each  insurance  bears 


711 

twelve  centesimi  per  lire  taxes,  whether  stock  or 
mutual.  This  enactment  has  been  recently  changed 
in  pursuance  of  a  decision  of  the  Parliamentary 
Commission  to  forty  per  cent,  on  the  premium  of 
insurances  which  pay  less  than  one -fourth  of  one 
per  mille  premium ;  to  twenty-five  per  cent,  for 
premiums  over  one-fourth  and  up  to  four-tenths  of 
one  per  mille ;  to  twenty  per  cent,  for  premiums 
over  four-tenths  and  up  to  six  tenths  per  mille  ;  to 
fifteen  per  cent,  for  premiums  over  six-tenths  and 
up  to  one  per  mille  ;  to  ten  per  cent,  for  premiums 
over  one  per  mille  and  up  to  ^ve  per  mille  ;  to  seven 
per  cent,  for  premiums  over  five  per  mille  and  up 
to  ten  per  mille  ;  to  five  per  cent,  for  premiums  over 
ten  per  mille.  Offices  pay  a  further  tax  of  0.30c. 
per  100  lire  (or  part  thereof)  on  all  payments  made 
by  them  for  losses  ;  also  a  charge  of  ten  per  cent, 
on  the  net  profits  realized  by  them  on  Italian  busi- 
ness. Both  of  the  first-mentioned  taxes,  i.  e.,  that 
on  premiums  and  that  on  losses,  are  borne  by  the 
assured. 

'  Attempts  to  fix  the  causes  of  fires  are  evidently 
not  made  with  care  and  skill,  otherwise  the 
number  of  fires  each  year  would  not  be  so  consider- 
able. 

In  case  of  fire,  according  to  the  ordinary  insur- 
ance conditions,  the  assured,  at  his  own  expense, 
must  make  a  sworn  statement  before  a  justice  of 


712 

the  peace  concerning  the  cause  and  all  the  cir- 
cumstances appertaining  to  the  fire  and  pre- 
sent a  copy  of  the  minute  without  delay  to  the 
general  agent  of  the  company.  The  right  to  de- 
clare the  insurance  invalid  in  case  of  fraud  accrues 
according  to  the  ordinary  insurance  conditions. 

The  means  for  extinguishing  fires  are  everywhere 
in  a  very  unsatisfactory  condition,  and  especially 
so  in  the  capital. 

The  four  native  stock  companies  and  forty-five 
mutual  companies,  together  with  eight  foreign 
companies  operating  in  Italy,  wrote  in  the  year 
1896  $4,355,646,109  in  risks  at  an  average  rate  of 
twelve  cents  per  $100.  They  received  therefor 
$5,230,138  in  premiums  and  paid  $2,850,666  in 
losses,  showing  an  average  loss  ratio  of  54.5  per 
cent.  On  the  year's  business  they  paid  out  for  re- 
insurance $1,518,874  and  the  relative  losses  aggre- 
gated $940,500,  showing  an  average  loss  ratio 
thereon  of  61.9  per  cent.  Their  net  premiums  and 
losses,  therefore,  were  $3,711,264  and  $1,910,166, 
respectively,  making  the  average  net  ratio  of  loss 
to  premiums  51.47  per  cent.  The  net  commissions 
and  expenses  made  a  total  expense  account  of 
$1,338,417,  thus  showing  an  average  ratio  of  total 
xpenses  to  net  premium  income  of  36.06  per  cent. 
The  total  net  underwriting  gain  for  the  year's 
trading  amounted  to  $462,681. 


713 


SPAIN. 


The  Spanish  government  administration  takes 
only  a  fiscal  interest  in  the  business  of  insurance. 
The  organization  of  companies  and  the  conduct  of 
the  business  generally  are  regulated  by  the  pro- 
visions of  the  Commercial  and  Civil  Codes  and  the 
common  law  applying  to  limited  corporations. 
The  Commercial  Code  requires  that  fifty  per  cent, 
of  the  nominal  value  of  the  company's  shares  shall 
be  paid  up  before  they  can  be  made  payable  to 
'*  bearer."  Until  the  shares  are  so  paid  up  they 
must  be  registered  in  the  names  of  the  respective 
shareholders. 

Both  native  and  foreign  companies  are  required 
by  law  to  make  an  annual  deposit  in  Spain  for  the 
protection  of  their  policy-holders,  amounting  to 
twenty  per  cent,  of  the  gross  premiums  received 
in  the  last  preceding  year.  Companies,  however, 
are  not  compelled  to  deposit  altogether  more  than 
1,000,000  pesetas,  or  $193,000,  but  this  maximum 
deposit  may  be  all  put  up  at  one  time.  The  de 
posit  is  made  in  the  office  of  the  chief  depository, 
and  must  be  either  in  cash  or  Spanish  securities. 
Real  estate  upon  the  peninsula  or  upon  neighbor- 
ing islands,  likewise  the  rents  derivable  therefrom, 
can  be  pledged  as  security  at  fifty  per  cent,  of 
their  value. 


714 

The  law  nominally  requires  a  great  variety  of 
statements,  but  in  reality  a  much  simpler  return 
is  now  accepted  by  the  authorities.  Insurance 
companies  are  obliged  to  publish  an  official  bal- 
ance sheet  in  the  Madrid  newspapers  and  file  it  in 
the  office  of  the  government  finance  department. 
In  this  balance  sheet  the  amount  of  the  premiums 
received  on  old  and  on  new  business  written  in 
Spain  during  the  year  must  be  specified.  Foreign 
companies  have  to  submit  to  the  department,  to- 
gether with  their  balance  sheet,  a  sworn  declara- 
tion supplying  in  detail  the  receipts  of  the  several 
branches  of  business  in  which  they  may  be  en- 
gaged, which  must  harmonize  with  their  income 
return.  The  duty  of  inspection  attaches  to  the 
officials  of  the  government  finance  department,  who 
usually  content  themselves  with  the  registration 
of  the  correct  name  of  the  company. 

Spanish  and  foreign  insurance  companies  have 
to  pay  a  two  per  cent,  tax  on  each  quarter's  pre- 
miums, plus  one-half  per  cent,  extra  for  surcharge 
and  municipal  tax,  making  in  all  two  and  one-half 
per  cent,  on  the  premiums.  This  is  temporarily  in- 
creased by  ten  per  cent.,  ^.  e.,  to  a  total  of  2.75  per 
cent,  as  a  ''war  measure."  A  similar  tax  is  levied 
in  the  same  way  on  agents'  commissions.  There 
is  also  a  government  stamp  tax  which  is  regulated 
by  the  amount  of  premium  charged  in  the  policy. 


715 

Foreign  companies  are  permitted  to  transact 
business  in  Spain  on  the  same  terms  as  native  com- 
panies. 

Neither  the  government  nor  any  municipal  body 
undertakes  insurance  against  fire  or  any  other 
risk  in  Spain. 

The  legal  authorities  are  especially  charged  with 
the  duty  of  making  inquiries  as  to  the  cause  of 
fires,  and  special  experts  are  attached  to  the  law 
courts  for  this  purpose.  If  no  insurance  company 
or  individual  moves  in  the  matter,  the  proceedings 
are  reduced  to  a  mere  formality.  Accordingly, 
when  a  fire  loss  occurs,  the  manager  or  agent  of 
the  insurance  company  is  called  upon  by  the  judge 
to  state  his  opinion  respecting  the  fire,  and  whether 
he  desires  to  take  part  in  the  investigation.  In- 
surance companies  are  not  compelled  by  law  to 
contribute  to  the  support  of  fire  brigades,  or  to  pay 
for  their  services  in  Spain. 

There  are  very  few  native  insurance  companies 
of  any  importance  in  Spain,  the  "Union  and 
Fenix,"  the  "  Catalana"  and  the  "  Provision  Espa- 
iiola"  being  almost  the  only  ones.  These  have 
united  for  tariff  purposes  with  the  French  com- 
panies operating  in  Spain,  and  the  Paris  Syndicate 
fixes  the  rates  and  publishes  the  tariff.  The 
ratings,  however,  are  in  form  only,  since  the  offices 
generally  compete  with  each  other  and  write  at 


716 

such  rates  as  their  judgment  indicates  are  suffi- 
cient. Business  is  conducted  both  by  means  of 
local  agents  and  with  the  offices  direct. 

The  commissions  paid  to  sub-agents  vary  consid- 
erably. When  the  business  is  done  by  ten-year 
policies  without  cancellation  clause,  the  commis- 
sion is  usually  from  sixty  per  cent,  to  one  hundred 
per  cent,  of  the  first  annual  premium  determined 
by  the  character  of  the  hazard  covered,  viz., 
whether  it  be  a  simple  or  a  manufacturing  risk. 
For  subsequent  years  the  commission  is  usually  ten 
per  cent.  When  the  policy  contains  the  cancella- 
tion clause,  the  rate  of  the  commission  is  generally 
twenty  per  cent,  on  each  year's  premium,  irre- 
spective of  the  character  of  the  risk  written.  Fac- 
tory policies  usually  contain  the  cancellation 
clause.  The  above  rates  are  those  paid  to  sub- 
agents,  the  chief  or  district  agent  receiving  five 
per  cent,  additional  from  the  head  office.  Com- 
missions are  sometimes  paid  to  the  assured.  Pol- 
icies are  issued  by  the  French  and  Spanish  com- 
panies usually  for  a  term  of  ten  years,  the  premium 
being  payable  annually,  and  the  contract  is  obliga- 
tory on  both  sides  for  that  period. 

In  the  case  of  factory  risks,  however,  the  repre- 
sentatives of  the  British  companies  have  succeeded 
in  generalizing  the  introduction  of  the  annual  can- 
cellation clause.     A  similar  reform  is  being  intro- 


717 

duced  as  regards  warehouse  insurance.  Where 
short- period  policies  are  written  the  rate  for  six 
months  is  two-thirds  of  the  annual  rate  ;  for  three 
months,  one-third. 

The  general  insurance  conditions  differ  from 
those  in  France,  usually,  only  in  so  far  as  that  indem- 
nity is  also  awarded  for  loss  of  rent  when  an  agree- 
ment relating  thereto  is  made  a  part  of  the  policy 
contract.  In  such  cases  indemnity  is  granted 
only  for  the  apartments  that  were  actually  leased 
on  the  day  of  the  fire.  Rents  are  reckoned  for  the 
time  during  which  the  damaged  premises  are  unin- 
habitable in  the  course  of  repairs,  but  not  over  one 
year.  Insurance  is  also  given  against  hazard  of 
loss  of  rent  and  the  carelessness  and  negligence  of 
neighbors,  as  is  done  under  similar  conditions  in 
France.  Loss  by  lightning,  explosion  of  gas  and 
steam  apparatus  without  fire  will  be  made  good  by 
the  company  upon  the  terms  of  a  special  agree- 
ment in  the  policy,  for  an  additional  premium. 

The  insured  in  Spain,  as  in  France,  has  to  furnish 
immediately,  in  case  of  fire,  a  statement  concern- 
ing the  fire  and  all  the  circumstances  connected 
therewith,  and  present  a  copy  thereof  to  the  official 
delegated  by  law  to  receive  the  same. 

According  to  the  general  insurance  conditions 
the  costs  of  policy  stamps  are  be  to  borne  by  the 
assured. 


718 

The  co-insurance  clause  is  compulsory  through- 
out Spain,  except  at  Gibraltar.  The  following  is 
the  text  of  the  clause  used  by  the  leading  Spanish 
company:  ''If  it  be  ascertained  that  the  value  of 
the  property  insured  by  the  policy  exceeded,  at 
the  moment  of  the  fire,  the  amount  insured  thereon, 
the  insured  is,  in  such  case,  his  own  insurer  for 
the  difference,  and  as  such  bears  his  ratable  share 
of  the  loss.  If  there  are  several  insurers,  and  if 
the  declarations  required  by  the  policy  have  been 
made,  the  company  will  in  case  of  loss  bear  a  share 
therein,  pursuant  to  the  conditions  of  the  present 
policy,  and  in  the  ratio  of  the  amount  insured 
by  it." 

In  the  adjustment  of  losses  professional  experts 
are  employed.  No  established  rule  prevails  as  to 
who  shall  take  the  lead  in  the  adjustment  of  a  loss 
in  which  several  companies  are  interested. 

The  only  really  active  company  in  Spain  is  '*La 
Union  y  el  Fenix  Espanol" — the  Union  and  the 
Spanish  Fenix.  This  company  was  organized  in 
1864,  and  conducts  both  fire  and  life  insurance 
business.  Its  fire  insurance  branch,  however,  con- 
stitutes its  strength.  It  is  indebted  for  its  success 
to  its  French  connections.  French  capital  is  largely 
employed  in  conducting  its  business,  and  its  Paris- 
ian patrons  retain  a  continued  and  valuable  inter- 
est in  its  operations.     The  net  premiums  of  the 


719 

fire  branch  of  this  company  in  the  year  1896  were 
7,526,410  pesetas,  or  $1,452,597.  The  losses  were 
57.40  per  cent.  The  net  income  of  the  entire  busi- 
ness amounted  to  2,057,849  pesetas,  or  $397,165, 
and  the  total  assets  to  19,253,597  pesetas,  or 
$3,715,944. 

Next  in  importance  to  the  "Spanish  Fenix" 
comes  "  La  Catalana"  fire  insurance  company,  of 
Barcelona.  Its  capital  stock  is  20,000,000  pesetas, 
or  $3,860,000,  which  insure  2,243,000,000  pesetas, 
or  $432,899,000,  and  it  claims  to  have  paid  from  its 
organization  to  1894,  5,183,417  pesetas,  or  $1,000,399, 
for  losses. 

Other  noteworthy  home  fire  insurance  companies 
are:  "La  Provision  Espanola,"  of  Seville,  with  a 
'capital  stock  of  2,000,000  pesetas,  or  $386,000 ;  in- 
surance in  force  in  1894,  49,000,000  pesetas,  or 
$9,457,000 ;  premiums  obtained,  289,000  pesetas, 
or  $55,893 ;  loss  payments,  184,046  pesetas,  or 
$35,521;  and  "LaAlianza  de  Santander,"  capital 
stock  1,000,000  pesetas,  or  $193,000,  conducting 
fire  and  transportation  insurance ;  premiums  for 
fire  insurance  in  1894,  46,352  pesetas,  or  $8,946  ; 
and,  finally,  "La  Union  Alcoyana,"  capital  stock 
250,000  pesetas,  or  $48,250  ;  assets  in  1894,  318,816 
pesetas,  or  $61,531  ;  reserve  fund,  68,816  pesetas, 
or  $13,281. 


720 


PORTUGAL. 


Unlike  Spain,  Portugal  has  no  government  of- 
ficial specially  authorized  to  control  or  investigate 
the  affairs  of  insurance  companies.  No  minimum 
amount  of  subscribed  capital  is  prescribed  by  law, 
but  at  least  five  per  cent,  of  the  subscribed  capital 
must  be  paid  up  before  operations  are  commenced. 

Fire  insurance  companies  do  not  come  under  any 
special  law,  as  such,  apart  from  laws  regulating 
joint  stock  companies.  The  fire  insurance  contract 
is  governed  by  Articles  432  to  445  of  the  Code  of 
Commerce. 

The  law  does  not  require  any  return  of  business, 
but  all  companies  must  publish  annually  their  bal- 
ance sheet  and  report. 

Fire  insurance  is  taxed  in  Portugal  in  two  ways, 
namely  :  1.  On  premiums,  collected  by  means  of 
adhesive  stamps  affixed  to  policies  and  renewa}  re- 
ceipts as  follows  :  New  policies  paid  half  by  the 
company  and  half  by  the  insured,  not  exceeding 
$6,  premium,  fifteen  cents  ;  exceeding  $5  and  not 
exceeding  $25,  seventy-five  cents  ;  exceeding  $25 
and  not  exceeding  $50,  $1.50 ;  exceeding  $50  and 
not  exceeding  $100,  $3  ;  exceeding  $100,  for  each 
fraction  of  $25,  seventy-five  cents.  Renewals — 
mainly  paid  by  the  company— not  exceeding  $20, 
premium,  three  cents ;  exceeding  $20  and  not  ex- 


721 

ceeding  $50,  seven  and  one-half  cents  ;  exceeding 
$50  and  not  exceeding  $100,  fifteen  cents  ;  exceed- 
ing $100,  for  each  fraction  of  $25,  fifteen  cents. 

Foreign  companies  are  permitted  to  transact 
business  in  Portugal  on  the  same  terms  as  native 
companies,  except  that  the  policies  of  foreign  com- 
panies must  bear  double  the  amounts  above  stated 
in  stamps. 

In  the  towns  of  Lisbon  and  Oporto  companies 
have  to  contribute  to  the  support  of  the  municipal 
fire  brigades. 

The  business  of  fire  insurance  is  not  conducted 
by  government  or  municipal  organizations. 

There  are  no  special  laws  in  force  relating  to  fire 
inquests,  but  the  cause  of  every  fire  is  inquired 
into  by  the  authorities. 

According  to  the  Portuguese  Commercial  Code, 
when  several  offices  are  interested  on  a  risk  they 
are  made  to  contribute  to  a  loss  in  the  order  of 
priority  of  execution.  But  it  is  usual  to  insert  a 
manuscript  proviso  declaring  this  clause  inopera- 
tive, and  providing  that  all  the  interested  com- 
panies' policies  shall  be  deemed  to  be  concurrent, 
irrespective  of  their  dates  of  execution. 

Business  is  effected  direct  with  the  offices  at 
Oporto  and  Lisbon  ;  but  by  means  of  local  agents 
at  other  places. 

Rates  of  commission  vary  from  ten  per  cent,  to 


729 

twenty-five  per  cent.,  averaging  probably  fifteen 
per  cent,  on  specials  and  twenty  per  cent,  on  non- 
hazardous  business.  '  Restrictions  as  to  payment 
of  commissions  to  the  insured  are  unknown. 

There  is  no  tariff  association  in  Portugal,  and 
rates  are  fixed  pretty  much  at  hazard  and  accord- 
ing to  custom.  Occasionally  there  is  a  sort  of  in- 
formal arrangement  among  the  companies  for  a 
common  rating  of  a  particular  risk  or  class  of  risks, 
but  no  regular  system  exists. 

Policies  are  generally  issued  for  one  year,  renew- 
able! annually.  There  is  no  fixed  rule  regarding 
the  rate  at  which  short-period  policies  are  issued. 
The  proportion  varies  with  the  nature  of  the  risk, 
and  isfuot  the  same  for  new  business  as  for  renew- 
als. On  special  risks  the  proportions  of  the  annual 
premiums  are :  One  month,  minimum,  one-sixth  ; 
three  months,  five-sixteenths  ;  six  months,  five- 
eighths. 

According  to  Article  433  of  the  Commercial 
Code, 'in  case  of  insufficient  insurance,  the  insured 
bearsja  ratable  share  of  the  loss.  A  clause  to  this 
effect  generally  appears  in  the  policy  conditions, 
from  which"it  is  not  usual  to  expunge  it. 

Tenant's  or  neighbor's  liability  does  not  exist  in 
Portugal. 

In  the  adjustment  of  losses  the  companies  gener- 
ally employ  some  one  of  recognized  standing  in 


723 

the  respective  branches  of  business  concerned,  such 
as  engineers,  machinery  agents,  builders,  etc.,  to 
settle  the  claims  with  the  assured.  There  are  no 
professional  assessors.  There  is  no  fixed  rule  or. 
custom  for  the  appointment  of  an  adjuster ;  but 
usually  when  several  companies  are  interested  the 
offices  arrange  by  mutual  agreement  for  the  ap- 
pointment of  one  adjuster  to  act  for  all. 

GREAT  BEITAIN. 

In  the  United  Kingdom  of  G-reat  Britain  fire  in- 
surance companies  are  subject  to  no  government 
supervision.  J^o  insurance  department  exists ; 
hence  there  are  no  fees  to  pay,  no  examinations  to 
submit  to  and  no  deposit  to  make. 

For  the  establishment  of  insurance  companies  no 
concession  is  required,  not  even  a  permit  for  the 
transaction  of  business  by  foreign  concerns.  The 
companies  are  treated  merely  as  ordinary  stock  in- 
stitutions under  the  Joint  Stock  Companies  Act. 
No  minimum  amount  of  subscribed  capital  is  fixed 
by  law.  Except  in  so  far  as  relates  to  the  require- 
ments of  the  general  laws  affecting  all  companies 
registered  under  the  Limited  Liability  Companies 
Act,  no  return  of  business  transacted  is  required. 

There  is  no  law  either  regarding  the  treatment  of 
the  unearned  premium  reserve,  the  rule,  however, 
being  to  reserve  from  thirty- three  and  one-third  to 


724 

fifty  per  cent,  of  the  previous  year's  premium  in- 
come as  a  liability  for  unexpired  policies.  A  con- 
dition of  insolvency  exists  only  when  the  company 
fails  to  meet  its  matured  obligations.  The  liabil- 
ity of  a  stockholder  for  the  debts  of  the  company 
is  unlimited,  unless  it  be  otherwise  specially  stip- 
ulated in  the  contract,  or  the  company  be  regis- 
tered under  the  Limited  Liability  Act. 

The  freedom  enjoyed  by  the  home  companies  is 
accorded  alike  to  foreigners.  There  is  one  special 
law,  however,  relating  to  the  lire  insurance  con- 
tract. In  1774  an  act  was  passed  prohibiting  in- 
surance on  property  unless  the  person  effecting 
such  insurance  had  an  interest  in  the  property, 
and  enacting  that  every  policy  must  specify  the 
name  of  the  person  interested.  The  act  also  pro- 
vides that  the  amount  recovered  shall  be  limited 
to  the  value  of  the  insurable  interest. 

The  business  of  fire  insurance  is  not  undertaken 
by  the  State  or  by  any  municipality  in  Great  Bri- 
tain, nor  is  it  conducted  by  a  governing  body  iu 
any  form. 

Notwithstanding  the  absence  of  government  su- 
pervision, the  x^ractice  of  insurance  companies  in 
the  United  Kingdom  has  some  peculiarities  worthy 
of  mention.  In  British  business  the  average  or  co- 
insurance clause,  insurance  against  loss  of  rent, 
etc.,  are  in  vogue. 


725 

The  average  clause  commonly  used  is  the  pro- 
rata clause.  The  language  used  is  this:  "When- 
ever a  sum  is  declared  to  be  subject  to  average,  if 
the  property  covered  thereby  shall  at  the  breaking 
out  of  any  fire  be  collectively  of  greater  value  than 
such  sum  insured,  then  the  assured  shall  be  con- 
sidered as  being  his  own  insurer  for  the  difference 
and  shall  bear  a  ratable  share  of  the  loss  accord- 
ingly." 

In  a  few  special  cases  of  mercantile  insurance  it 
is  permissible  to  use  the  two  conditions  of  average. 
These  conditions  are  stated  thus :  1.  ''  Whenever  a 
sum  insured  is  declared  to  be  subject  to  average,  if 
the  property  covered  thereby  shall  at  the  break- 
ing out  of  any  fire  be  collectively  of  greater  value 
than  such  sum  insured,  then  the  insured  shall  be 
considered  as  being  his  own  insurer  for  the  differ- 
ence and  shall  bear  a  ratable  share  of  the  loss  ac- 
cordingly. 2.  But  if  any  of  the  property  included 
in  such  average  shall,  at  the  breaking  out  of  any 
fire,  be  also  covered  by  any  other  specific  insur- 
ance, i.  e.,  by  an  insurance  which  at  the  time  of 
such  fire  applies  to  part  only  of  the  property  actu- 
ally at  risk  and  protected  by  this  insurance  and  to 
no  other  property  whatsoever,  then  this  policy  shall 
not  insure  the  same  except  only  as  regards  any  ex- 
cess of  value  beyond  the  amount  of  such  more 
specific  insurance  or  insurances,  which  said  excess 


726 

is  declared  to  be  under  the  protection  of  this  policy 
and  "  subject  to  average"  as  aforesaid." 

In  a  few  other  instances  the  '*  seventy-five  per 
cent,  clause"  is  adopted.  It  says:  "If  the  sum 
insured  on  agricultural  produce,  either  separately 
or  in  one  amount  with  other  property,  shall  at  the 
breaking  out  of  a  fire  be  less  than  three-fourths  of 
the  value  of  all  the  property  insured  in  that 
amount,  then  the  assured  shall  be  considered  as 
being  his  own  insurer  for  the.  difference  between 
the  sum  insured  and  the  full  value  of  the  property 
insured  at  the  time  of  the  fire  and  shall  bear  a 
ratable  share  of  the  loss  accordingly." 

It  is  obligatory  to  apply  average — either  the 
"Pro-rata  clause"  or  the  "Two  conditions" — to 
all  policies  covering  a  plurality  of  risks,  except 
that  the  "  seventy-five  per  cent,  clause  "  may  be 
employed  in  policies  on  farming  stock.  Otherwise 
the  application  of  the  principle  of  average  is  not 
compulsory,  nor  is  it  usual  except  in  case  of  risks 
falling  under  a  few  tariffs  which  render  its  appli- 
cation obligatory. 

Policies  covering  goods  in  more  than  one  ware- 
house or  on  different  floors  or  rooms  as  general  float- 
ers are  subject  to  the  co-insurance  or  average  clause- 
Insurance  against  loss  of  rent  is  written  in  Great 
Britain,  with  the  following  as  a  sample  of  the 
clause  in  use : 


727 

''Indemnity  is  payable  only  when  the  building 
concerned  has  been  so  damaged  or  destroyed  by 
fire  that  it  is  not  fit  to  be  rented.  The  insurance 
covers  solely  the  loss  of  rent  from  the  day  of  the 
fire  to  the  time  of  re-renting,  during  repairs,  or 
complete  reinstatement  of  the  building,  but  not  to 
exceed monthly  payments  of  rent." 

The  premium  is  the  same  as  for  the  insurance 
of  the  building  to  which  the  rent  insurance  re- 
lates. 

Insurance  against  lightning  or  gas  explosion  (ex- 
cept in  buildings  which  belong  to  a  gas  company) 
is  covered  without  additional  premium. 

Liability  for  damage  to  contiguous  property  is 
not  insured  in  the  United  Kingdom.  Landlords' 
property  is  not  insured  by  the  tenant  except  in 
cases  where  the  terms  of  the  tenancy  or  lease  make 
the  tenant  responsible  for  damage  by  fire.  This 
responsibility  is  unusual,  existing  only  where  the 
tenant  holds  the  property  under  a  lease  for  a  term 
of  years.  Such  insurance  might  form  part  of  the 
tenants'  ordinary  insurance. 

Fees  for  policies,  alterations,  inspections,  etc., 
are  not  customary. 

Policies  are  generally  issued  for  one  year,  renew- 
able annually  by  receipt.  With  the  exception  of 
mercantile  insurances  [of  wares,  etc.],  policies  are 
renewed  in  England  on  the  quarter  days  :  25th  of 


728 

March,  Lady  day  ;  24th  of  June,  Midsummer ;  the 
29th  of  September,  Michaelmas,  and  the  25th  of 
December,  Christmas.  For  Scottish  insurance  the 
customary  renewal  days  are  the  2d  of  February, 
Candlemas ;  the  15th  of  May,  Whitsunday  ;  the 
1st  of  August,  Lammas,  and  the  llth  of  November, 
Martinmas. 

A  grace  of  fifteen  days  from  the  expiration  of  a 
policy  is  allowed  the  insured  for  the  renewal  of 
annual  insurance,  during  which  time  the  company 
grants  him  protection.  'Insurance  is  rarely  written 
for  a  term  of  years,  and  then  only  upon  prepay- 
ment. Upon  seven  years'  insurance  one  free  year 
is  granted. 

Business  is  transacted  both  through  local  agents 
and  direct  with  the  offices. 

The  maximum  commission  is  fifteen  per  cent., 
and  this  is  also  the  usual  rate  both  on  tariff  and 
non-tariff  business.  On  a  few  classes  of  risks,  such 
as  woolen  and  cotton  mills,  only  ten  per  cent,  can 
be  allowed.  A  considerable  amount  of  insurance 
reaches  the  companies  without  being  subject  to  the 
payment  of  a  commission.  Commission  is  allowed 
to  agents  only,  but  in  a  good  many  instances  the 
assured  holds  an  agency  appointment  and  so  ob- 
tains the  commission,  although  it  may  be  stated 
that  the  Fire  Offices'  Committee  have  recently,  in 
connection  with  several  tariffs,   agreed  that  the 


729 

assured  shall  not  receive  commission  as  agent  on 
his  own  insurances. 

A  tariff  association  known  as  the  ' '  Fire  Offices' 
Committee,"  of  which  all  the  leading  offices  are 
members,  fixes  rates  for  all  the  more  important 
classes  of  business.  There  is  no  general  tariff,  but 
a  separate  tariff  is  issued  for  each  class.  All  busi- 
ness not  subject  to  any  tariff  is  governed  by  a 
minimum  rating  of  one  shilling  and  sixpence  per 
£100,  equivalent  to  seven  and  one-half  cents  per 
$100. 

This  association  has  enjoyed  an  uninterrupted 
and  continuous  existence  for  the  last  forty  years, 
having  been  organized  on  its  present  basis  in  1858. 
While  no  definite  rule  obtains  for  the  systematic 
revision,  at  periodical  intervals,  of  the  rates  ap- 
plicable to  all  or  any  classes  of  hazards,  or  for  the 
production  by  members  of  tables  showing  the  ex- 
perience of  their  respective  companies,  in  actual 
practice  rates  are  revised  from  time  to  time  on  the 
motion  of  individual  members  or  on  the  recom- 
mendation of  a  sub-committee  when  the  exigencies 
of  the  business  seems  to  call  for  such  a  measure, 
and  on  such  occasions  the  production  is  sometimes 
required  of  statements  of  experience,  although  this 
is  not  an  invariable  rule.  Under  this  method  of 
rating  upon  the  joint  experience  of  all  the  com- 
panies it  has  been  found  that  non-association  com- 


730 

panies  cannot  transact  a  profitable  business.  To  be 
a  member  of  the  Fire  Offices'  Committee  is  regarded 
as  a  high  privilege,  and  no  company  is  admitted 
until  it  has  first  undergone  an  examination  and  has 
satisfied  its  would-be  associates  that  its  manage- 
ment is  such  as  will  justify  the  expectation  of 
success. 

It  may  here  be  stated  that  there  are  practically 
no  mutual  companies  in  Great  Britain,  the  rates 
having  been  kept  so  close  to  the  combined  loss  and 
expense  ratio  that  little  or  no  benefit  can  be  derived 
from  mutual  insurance,  and  when  such  institutions 
have  been  started  they  have  usually  existed  for  a 
short  time  only  and  have  been  ultimately  aban 
doned. 

Small  losses  in  England  are  adjusted  for  the  most 
part  by  an  inspector  or  chief  of  the  claims  depart- 
ment of  the  company  concerned.  In  more  import- 
ant cases  professional  assessors — not  salaried  offi- 
cials of  the  companies — are  usually  employed. 
Where  several  companies  are  interested,  the  one 
which  has  tlie  largest  interest  takes  the  lead  and 
acts  for  the  others.  Where  offices  are  equally  in- 
terested, the  one  which  ranks  first  in  seniority  in 
point  of  age  takes  the  lead.  The  assured  may  also 
call  in  in  his  interest  an  expert  adjuster.  In  case 
of  disagreement  the  matter  is  decided  by  an  award 
of  arbitration. 


731 

British  companies  re-insure  but  little  under  fixed 
contracts.  They  oifer  the  business  almost  exclu- 
sively by  "request  note"  to  the  re-insuring  com- 
pany, which,  for  each  acceptance,  issues  a  ' '  take 
note."  On  each  quarter  day  the  re-insured  com- 
pany sends  the  re-insuring  company  a  list  of  the 
expiring  re-insurances,  which  has  to  be  returned  as 
soon  as  practicable,  marked  so  as  to  show  each  re- 
insurance renewed. 

There  are  no  special  laws  in  force  relating  to  fire 
inquests,  except  only  as  regards  the  municipality 
of  London.  In  the  earliest  times  it  was  the  general 
practice  for  coroners  to  hold  inquiries  respecting 
the  origin  of  fires.  These  fire  inquests,  however, 
had  fallen  into  desuetude,  until  an  act  was  passed 
in  1888  empowering  coroners  in  London  to  resume 
the  practice  of  holding  such  inquiries. 

Fire  insurance  companies  as  such  are  not  taxed 
in  any  shape  or  form,  except  that  every  policy 
must  bear  a  one  penny  (two  cent)  stamp.  Insur- 
ance companies,  like  every  other  corporation,  are 
required  to  pay  an  income  tax,  which  is  levied 
upon  their  net  profits  (that  is,  after  deducting  the 
losses  and  expenses  of  conducting  their  business), 
the  amount  of  which  is  regulated  by  the  necessities 
of  the  Exchequer,  and  which  at  the  present  time 
amounts  to  eightpence  in  the  pound  (8d.  in  the  £), 
equal  to  three  and  one-third  per  cent.     No  other 


732 

tax  of  any  other  sort  or  kind  is  imposed,  and  con 
sequently  the  company  is  liable  for  no  tax  if  no 
profit  is  made.  Insurance  companies  are  compelled 
by  law  to  pay  for  services  rendered  by  fire  brig- 
ades outside  of  their  own  areas  generally  and  in- 
side such  areas  in  a  few  cases.  In  London  special 
powers  enable  the  County  Council  to  levy  a  tax 
on  the  companies  based  on  the  sums  insured  on 
property  in  the  metropolitan  area. 

Upon  the  authority  of  the  Finance  Chronicle^  of 
London,  we  are  told  that  at  the  close  of  the  year 
1896  there  were  eighty-nine  fire  insurance  compan- 
ies operating  in  Great  Britain,  of  which  fifty-six 
were  native  companies  and  thirty-three  foreign 
companies.  These  native  companies  had  a  paid-up 
capital  of  $44,457,120  ;  gross  assets  (less  life  liabili- 
ties), $144,095,025,  and  fire  liabilities  of  $47,183,930, 
leaving  a  net  surplus  of  $96,911,095.  From  the 
the  same  source  we  gather  that  the  premium  in- 
come of  the  fifty-six  native  companies,  derived  from 
business  all  over  the  world,  amounted  to  $94,419,- 
915,  and  their  losses  and  expenses  to  $85,121,116, 
leaving  $9,298,800  profit. 

UNITED    STATES. 

There  is  no  Federal  insurance  Code  in  the  United 
States  ;  every  State,  being  an  independent  sover- 
eignty, makes  its  own  insurance  laws,  and,  there 


733 

being  forty-five  States  and  three  Territories  and  the 
District  of  Columbia  having  organized  legislatures, 
these  laws,  as  might  be  supposed,  differ  consider- 
ably. 

In  nearly  every  State  there  is  an  Insurance  De- 
partment, presided  over  by  a  commissioner  or 
superintendent,  who,  subject  to  the  laws  of  the 
State,  exercises  jurisdiction  over  all  matters  per- 
taining to  insurance,  and  to  whom  a  statement 
showing  the  financial  condition  of  the  company  has 
to  be  rendered  after  the  close  of  each  year.  In  two 
of  the  States — Indiana  and  Georgia — a  semi-annual 
statement  also  is  required  to  be  filed.  In  all  States 
where  insurance  departments  exist  the  company  is 
required  by  law  to  answer  any  interrogatories  touch- 
ing any  item  of  its  statement  which  the  Commis- 
sioner or  Superintendent  may  make,  and  such 
ofiicer  possesses  the  power  of  verifying  the  state- 
ment rendered  by  making  an  examination  of  the 
books  of  the  company. 

The  Commissioners,  Superintendents  or  other 
officials  in  charge  of  insurance  are  chosen  as  fol- 
lows: 

Elected  by  direct  vote  of  the  people  in  the  States 
of  Vermont,  Georgia,  Indiana,  Nebraska,  Idaho, 
Florida,  Colorado,  North  Dakota,  Utah,  West  Yir- 
ginia,  Louisiana,  Wisconsin,  Wyoming,  Oregon, 
North  Carolina,  Arkansas,  Iowa,  Montana,  Nevada, 


734 

Washington,  and  Territories  of  Arizona  and  Okla- 
homa. 

Elected  by  the  Legislature  in  the  States  of  Rhode 
Island,  Mississippi,  Virginia,  Tennessee,  South 
Carolina,  Alabama  and  Territory  of  New  Mexico. 

Appointed  by  the  Governor  in  the  States  of 
Maine,  New  York,  Texas,  Missouri,  California, 
New  Hampshire,  New  Jersey,  Ohio,  Kansas, 
Massachusetts,  Pennsylvania,  Michigan,  Minne- 
sota, Connecticut,  Delaware,  Illinois  and  South 
Dakota. 

Appointed  by  the  Commissioners  in  District  of 
Columbia. 

Elected  by  the  Board  of  Public  Works  in  Mary- 
land. 

Appointed  by  the  State  Auditor  in  Kentucky. 

In  most  of  the  States  the  laws  provide  that  no 
stock  company  shall  be  permitted  to  transact  busi- 
ness until  it  has  a  paid-up  capital  of  not  less  than 
$200,000,  and  where  such  a  law  exists  no  company 
of  any  other  State  or  country  can  carry  on  busi- 
ness in  such  State  without  possessing  a  paid-up 
capital  of  a  similar  amount.  In  these  States  the 
laws  likewise  provide  that  any  company  organized 
in  a  foreign  country  and  desirous  of  doing  business 
in  the  United  States  shall  first  deposit  in  some 
State  of  the  United  States,  in  United  States  secur- 
ities, a  sum  which  shall  not  be  less  than  $200,000. 


735 

In  the  State  of  New  York,  besides  requiring  the 
deposit  of  $200,000  with  the  Superintendent  of  the 
Insurance  Department  by  such  foreign  company, 
which  is  deemed  its  minimum  capital,  the  laws 
provide  that  there  shall  be  an  additional  deposit 
of  $300,000  made  within  the  United  States,  either 
with  the  Insurance  Departments  or  with  trustees 
who  must  be  citizens  of  the  United  States  and 
whose  appointment  as  trustee  is  subject  to  the  ap- 
proval of  the  Superintendent,  making  $500,000  in 
the  aggregate.  All  companies  are  required,  in 
addition,  to  maintain  their  solvency  according  to 
certain  prescribed  methods  of  determining  it,  so  as 
to  leave  their  capital  unimpaired.  As  every  policy 
issued  contains  a  condition  that  it  may  be  can- 
celled at  any  time,  either  at  the  request  of  the 
company  or  of  the  assured,  it  is  provided  that  the 
company  shall  always  have  in  hand  a  sum  of 
money  sufficient  to  retire  its  policies  by  returning 
to  the  policy-holder  the  full  pro  rata  premium  for 
the  unexpired  time  thereof.  In  addition,  there- 
fore, to  the  holding  of  assets  which  shall  be  suf- 
ficient to  meet  all  accrued  losses  and  other  ex- 
penses incurred  in  the  conduct  of  its  business  the 
company  must  have  in  hand  sufficient  funds  to 
cancel  its  outstanding  policies  pro  rata.  If  the 
statement  presented  to  the  Insurance  Department 
should  indicate  that  after  these  various  liabilities 


736 

have  been  charged  up  the  capital  of  the  company- 
is  impaired  to  a  greater  extent  than  twenty-five 
per  cent,  the  Superintendent  or  Commissioner  of 
Insurance  is  required  to  report  it  to  the  Attorney- 
General,  who  will  thereupon  insist  either  that  the 
impairment  shall  be  made  good  by  an  assessment 
upon  the  stockholders  of  the  company,  or  that  the 
company  shall  cease  transacting  business. 

Besides  the  $200,000  required  by  the  laws  of  the 
State  of  New  York  to  be  deposited  with  the  Super- 
intendent of  Insurance  of  that  State,  the  State  of 
Ohio  requires  a  deposit  of  $100,000  ;  the  State  of 
Oregon  $50,000,  the  State  of  Virginia  not  less  than 
$10,000  nor  more  than  $50,000,  the  amount  depend- 
ing upon  the  volume  of  business  transacted  in  the 
State  ;  the  State  of  Georgia  $25,000,  and  the  Terri- 
tory of  New  Mexico  $10,000.  The  deposit  required 
in  the  first  named  of  these  States  applies  to  foreign 
companies  only  ;  in  the  last  three  and  in  the  Terri- 
tory of  New  Mexico,  to  all  companies,  whether 
native  or  foreign. 

Every  company,  whether  of  any  other  State  or 
country,  is  required  to  appoint  an  attorney  in  the 
State  in  which  it  does  business,  upon  whom  pro- 
cess can  be  served,  in  order  to  bring  its  contracts 
under  the  control  of  the  laws  of  the  State,  the 
Superintendent  or  Commissioner  of  Insurance, 
however,  in  certain  States  being  authorized  by  law 


737 

to  accept  service  in  behalf  of  any  company  trans- 
acting business  in  such  State. 

To  guard  against  local  or  State  bias  or  prejudice 
there  is  a  Constitutional  provision  for  the  creation 
of  Federal  Courts  as  well  as  State  Courts,  in  each 
State,  and  an  alien  has  the  right  of  bringing  a  suit 
in  the  Federal  Court  if  he  so  elects,  or  if  brought 
against  him  in  the  State  Court  to  have  it  trans- 
ferred to  the  Federal  Court,  but  this  liberal  pro- 
vision has  been  practically  nullified  in  many  of  the 
States  by  the  enactment  of  a  law  under  which  the 
State,  exercising  the  police  powers  which  it  enjoys 
under  the  Federal  Constitution,  requires  that  every 
alien  company  before  receiving  a  license  or  the  re- 
newal thereof  shall  enter  into  an  agreement  to  sub- 
mit to  the  jurisdiction  of  the  State  Court  any  cause 
of  action  which  may  arise  with  the  assured  within 
its  borders. 

There  are  laws  also  which  regulate  the  conditions 
which  may  be  embraced  in  the  policy,  some  States 
requiring  a  different  set  of  conditions  to  those  de- 
manded by  other  States.  There  are  laws  also 
which  provide  that  the  sum  insured  upon  any 
building  shall  be  regarded  as  the  value  of  the 
building  in  the  event  of  its  total  destruction  by 
fire,  and  laws  which  forbid  the  use  of  the  co-insur- 
ance clause.  There  are  laws,  likewise,  which 
make  illegal  any  combination    of    companies   or 


738 

agents  for  the  purpose  of  making  or  sustaining 
rates. 

On  the  other  hand,  there  is  a  law  in  the  State  of 
New  York  under  which  a  company  is  empowered 
to  set  aside  a  certain  portion  of  its  assets  as  a  spe- 
cial fund,  which  fund  is  released  from  all  liability 
for  losses  resulting  from  conflagrations,  and  which 
places  the  company  in  a  position  to  continue  busi- 
ness even  when  unable,  by  reason  of  heavy  losses 
sustained  by  conflagrations,  to  meet  its  obligations 
in  full. 

The  aggregate  fire  premium  receipts  of  all  the 
companies  transacting  business  in  the  United  States, 
by  reason  of  the  magnitude  of  the  property  cov- 
ered, is  far  larger  than  in  any  other  country  of  the 
world.  The  total  receipts  of  all  the  companies 
doing  business  in  the  United  States  for  the  year 
1897,  native  and  foreign,  amounted  to  the  enormous 
sum  of  $152,750,000.  These  premiums  were  col- 
lected by  248  native  stock  companies,  35  foreign 
and  222  mutuals.  These  248  native  stock  compa- 
nies possessed  on  December  31,  1897,  gross  assets 
of  $247, 300, 000,  their  liabilities  were  $99, 125, 000,  and 
their  surplus  was  $148,175,000.*  Up  to  January  1, 
1897, 1,088  joint  stock  fire  insurance  companies  had 
been  organized  in  the  United  States,  of  which  840 

*New  York  State  Insurance  Report  for  1898,  and  the  Insurance 
Year  Book  for  1897. 


739 

subsequently  failed  or  retired.  From  tlie  date  of 
the  Independence  of  the  United  States  fifty-nine 
foreign  companies  have  been  regularly  admitted  to 
do  business  therein,  of  which  number  twenty -four 
have  retired  after  a  longer  or  shorter  experience, 
because  of  unsatisfactory  results  attending  their 
venture,  leaving  thirty-five  companies  of  foreign 
nationality  still  transacting  business.  According 
to  the  returns  supplied  by  the  Superintendent  of 
Insurance  of  the  State  of  'New  York  and  by  the 
1898  edition  of  the  Fire  Insurance  Pocket  Index, 
we  find  that  these  foreign  companies  had  at  the 
close  of  the  year  1897  invested  funds  in  the  United 
States  of  the  value  of  $72,700,000,  their  liabilities, 
including  unearned  premium,  amounting  to  §32,- 
330,000,  and  their  surplus  over  all  $32,750,000. 
These  companies  have  established  agencies  in  nearly 
every  city  and  town  of  the  United  States. 

The  extent  of  the  country  being  so  large,  a  num- 
ber of  associations  of  companies  have  been  formed 
for  the  better  control  of  the  business,  and  especi- 
ally in  the  making  and  maintenance  of  adequate 
rates  of  premium.  Thus  we  find  the  *'  New  England 
Insurance  Exchange"  controlling  such  matters  in 
all  of  the  New  England  States  ;  the  ''  Underwriters* 
Association  of  New  York  State"  controlling  the 
State  of  New  York  outside  of  the  city  of  New 
York  and  its  immediate  vicinity;  '^ The  Union" 


740 

(Western)  governiDg  the  Northwestern  States  ;  the 
"Underwriters'  Association  of  Middle  Depart- 
ment," comprising  the  States  of  Pennsylvania, 
New  Jersey,  etc.;  the  "Southeastern  Tariff  Asso- 
ciation," embracing  the  Southern  States,  and- the 
"Fire  Underwriters  of  the  Pacific,"  comprising 
States  upon  the  Pacific  Coast.  Besides  these  prin- 
cipal associations  of  underwriters  there  are  numer- 
ous others  having  a  more  or  less  extended  sphere 
of  operations,  and,  in  addition,  every  important 
city  or  town  has  its  board  of  local  agents,  organ- 
ized and  maintained  for  the  purpose  of  securing 
correct  practices  in  underwriting.  The  companies 
for  the  most  part  divide  the  control  of  their  busi- 
ness into  sections,  establishing  branches  for  each 
section  and  giving  jurisdiction  therein  to  their  ap- 
pointed representatives.  By  these  various  branches 
special  agents  are  appointed  to  supervise  the  busi- 
ness and  to  inspect  all  risks  presenting  features  of 
unusual  hazard,  and  who  are  likewise  employed  to 
adjust  losses  when  and  as  they  occur.  The  cost  of 
employing  these  special  agents,  not  only  in  salaries 
but  in  traveling  expenses,  is  very  considerable  and 
forms  a  formidable  item  in  the  companies'  expense 
account. 

Local  agents,  as  a  rule,  write  their  own  policies 
on  blanks  supplied  to  them,  sending  a  report 
thereof  to  the  chief  or  branch  office  of  the  company. 


741 

which  report  must  contain  an  exact  copy  of  the 
wording  of  the  policy.  They  are  required  to  make 
up  their  account  at  the  close  of  the  month  and  to 
remit  the  balance  shown  thereby  after  deducting 
their  commission  and  such  authorized  expenses  in 
the  way  of  postage  or  telegrams  as  they  may  have 
disbursed.  Such  local  agents  are  usually  compen- 
sated by  a  commission  upon  the  premiums  written, 
but  occasionally  in  the  larger  cities  they  are  paid 
by  a  salary. 

While  the  premiums  paid  are  large  the  losses  in- 
curred are  correspondingly  heavy.  During  the 
past  twenty-three  years  there  have  been  paid  in  fire 
losses  in  the  United  States  $1,439,500,000,  or  an  av 
erage  of  $62,587,000  per  year,  an  amount  of  loss 
which  is  perfectly  appalling  in  its  magnitude.  Of 
the  losses  of  the  past  year  39.35  per  cent,  occurred 
from  accidental  and  supposedly  not  preventable 
causes,  17.96  per  cent,  were  believed  to  have  origin- 
ated from  inherent  defects  in  the  buildings  in  which 
they  occurred,  7.40  per  cent,  from  incendiarism  or 
arson,  35.29  per  cent,  from  unknown  or  unreported 
causes.  * 

In  some  of  the  larger  cities  building  laws  have 
been  enacted  designed  to  prevent  those  structural 
defects  which  have  produced  so  many  losses,  and  a 

*  Chronicle  Fire  Tables,  1898. 


742 

disposition  is  being  manifested,  notably  in  Massa- 
chusetts and  in  New  York,  by  the  employment  of 
a  Fire  Marshal,  invested  with  plenary  powers,  to  in- 
vestigate the  origin  of  fires,  especially  those  which 
are  attended  with  suspicion. 

As  in  other  countries,  the  receipts  of  fire  insur- 
ance companies  have  proved  a  tempting  prey  for  the 
tax  gatherer,  and  the  statistics  show  that  for  the 
year  1897  2.61  per  cent,  of  the  premiums  received 
was  paid  for  taxes.  In  but  three  States  is  the  tax 
levied  upon  the  premiums  after  the  losses  have 
been  deducted,  and  it  frequently  happens  that 
taxes  are  paid  in  certain  States  in  which  no  profit 
whatever  has  been  made.  Besides  direct  taxes  the 
companies  are  required  to  pay  for  agents'  licenses, 
and  in  certain  municipalities  a  heavy  license  fee 
for  the  privilege  of  transacting  business.  As  the 
rate  of  tax  differs  in  various  States  reciprocal  or 
retaliatory  laws  have  been  enacted  under  which  it 
is  provided  that  wherever  companies  foreign  to  the 
State  are  required  to  make  a  deposit  or  pay  a  tax, 
the  companies  of  the  State  where  the  deposit  is  re- 
quired or  the  tax  is  imposed  shall  be  subjected  to 
the  same  deposit  requirement  or  tax  in  other 
States  where  they  are  doing  business.  Under  the 
operation  of  these  differing  laws  there  is  no  exact 
equality  in  taxation,  even  with  the  native  compan- 
ies, the  ratio  of  tax  in  other  States  being  measur- 


743 

ably  governed  by  the  tax  rate  imposed  by  tlie 
State  under  whose  laws  they  had  been  organized. 
Foreign  companies,  i.  e.^  companies  of  other  na- 
tionalities, pay  a  varying  tax  rate,  but  on  the  aver- 
age it  is  about  the  same  as  is  paid  by  their  native 
competitors.  Efforts  have  been  recently  made  in 
certain  States  to  discriminate  against  the  foreign 
comxmnies  in  the  matter  of  tax,  but  the  legisla- 
tures, recognizing  the  inhospitality  as  well  as  the 
unfairness  of  such  treatment,  have  manifested  no 
disposition  to  encourage  the  movement. 

Note. — For  data  supplied  and  assistance  rendered  in  the  prepar- 
ation of  this  digest  my  thanks  are  due,  and  are  hereby  tendered  to, 
the  Royal  Insurance  Company  of  Liverpool,  the  Magdeburg  Fire 
Insurance  Company,  of  Magdeburg,  Germany  ;  the  Hamburg- 
Bremen  Insurance  Company,  of  Hamburg,  Germany  ;  the  Helvetia 
Insurance  Company,  of  St.  Gall,  Switzerland  ;  the  Netherlands  In- 
surance Company,  of  Zutphen,  Holland  ;  the  Svea  Insurance  Com- 
pany, of  Gothenburg,  Sweden,  and  to  the  Weekly  Underwriter,  of 
New  York. 


COMMENTAEY. 

In  reciting  the  laws  and  practice  which  govern 
the  fire  insurance  companies  of  the  world  generally 
I  have  confined  myself  to  the  United  States  and  the 
leading  countries  of  Europe,  the  limits  of  this  paper 
hardly  permitting  me  to  extend  my  researches  fur- 
ther. It  may,  however,  be  stated  in  passing  that 
in  the  South  American  Republics,  in  the  British 


744 

colonies  of  Canada,  Australia  and  South  Africa, 
and  in  China  and  Japan,  companies  have  been  or- 
ganized and  successfully  conducted  with  native 
capital  to  back  them,  and  with  these  the  compan- 
ies of  the  old  world  are  found  engaged  in  honor- 
able competition.  While  the  laws  under  which 
the  companies  live,  and  the  methods  which  they 
pursue,  differ  mateTially,  yet,  on  the  whole,  a  cer- 
tain degree  of  harmony  is  found.  Wherever  the 
danger  of  fire  is  greatest  there  the  insurance 
company  is  most  needed  and  there  its  activity 
is  keenest.  In  France  and  Spain,  in  Italy 
and  in  the  Spanish  settlements  of  the  New 
World  generally,  almost  every  building  is  a  for- 
tress constructed  as  much  for  defense  against  an 
enemy  as  to  prevent  its  destruction  by  fire.  Where 
such  buildings  exist  fire  insurance  languishes,  and 
while  merchandise  stored  in  such  structures 
is  usually  protected  by  insurance  the  buildings 
themselves  are  frequently  left  uncovered,  the  dan- 
ger from  fire  being  too  remote  to  create  anxiety 
concerning  them.  With  the  exception  of  Great 
Britain,  it  will  appear  from  what 'has  been  stated 
that  all  of  the  nations  have  passed  laws  for  the 
government  of  fire  insurance  companies,  but  no- 
where, except  in  the  United  States,  do  we  find 
any  law  requiring  the  company  to  pay  more  than 
the  actual  loss  sustained,  which  loss  must  be  es- 


745 

tablislied  by  proof  after  the  fire.  The  United 
States  stands  alone,  therefore,  in  enacting  laws 
which  enable  the  assured  to  realize  a  profit  from 
a  disaster.  The  method  of  obtaining  business 
through  the  medium  of  agents  and  brokers  com- 
pensated by  a  commission  exists  all  over  the 
world,  the  commissions  paid  varying  accord- 
ing to  the  difficulties  to  be  met  with  in  inducing 
property  owners  to  insure. 

In  Holland  there  appears  to  exist  a  practice  in 
securing  business  which  obtains  in  no  other  coun- 
try, under  which  officers,  managers  and  brokers 
meet  on  the  Bourse  at  certain  hours  of  the  day  for 
the  purpose  of  receiving  and  accepting  applications 
for  insurance.  I  commend  this  plan  to  the  careful 
consideration  of  the  New  York  brokers  and  would 
supplement  it  by  the  suggestion  that  in  fitting  up 
their  Exchange  they  provide  a  rostrum  and  an  auc- 
tioneer, that  each  risk  be  submitted  to  compe- 
tition, and,  reversing  the  practice  commonly  gov- 
erning such  transactions,  knock  it  down  to  the 
loicest  bidder.  Such  a  public  allotment  of  the 
business  would  doubtless  relieve  both  broker  and 
manager  from  those  qualms  of  conscience  and  the 
physical  exhaustion  consequent  upon  the  effort 
which  has  to  be  made  to  deceive  their  competitors 
when  solemnly  testifying  as  to  the  rate  charged  and 
the  commission  paid.     If  Ananias  had  adopted  this 


746 

method  of  disposing  of  his  property  he  might  have 
been  alive  to-day ;  had  he  been  in  the  insurance 
business  he  would  surely  have  died  sooner. 

The  laws  of  France  and  other  countries  operating 
under  the  Napoleonic  Code  seem  to  be  worthy  of 
special  comment.  Under  these  laws  a  citizen  is 
held  liable  for  any  loss  which  might  be  caused  di- 
rectly or  indirectly  by  him,  upon  the  theory  that 
a  man  should  be  responsible  for  the  consequences 
of  his  own  negligence  or  neglect,  which,  besides 
being  the  law,  would  seem  to  be  good,  sound,  com- 
mon sense  also.  If  this  principle  were  recognized 
by  our  Code,  it  seems  to  me  that  our  losses  by  fire 
would  be  very  greatly  reduced,  and  that  those  ac- 
cidents which  are  constantly  occurring  on  account 
of  the  defective  construction  of  flues  would  be 
measurably  reduced.  In  1894  a  law  was  enacted  in 
the  State  of  Massachusetts  under  which  a  Fire 
Marshal  was  appointed  for  the  Commonwealth, 
whose  duties  require  him  to  investigate  the  cause, 
origin  and  circumstances  of  every  fire  occurring  in 
the  State,  and  under  the  authority  given  him  by 
law  he  is  empowered  to  take  or  cause  to  be  taken 
the  testimony  under  oath  of  all  persons  supposed 
to  be  cognizant  of  any  facts  relating  to  the  fire 
which  is  the  subject  of  his  investigation,  and  when 
he  finds  sufficient  evidence  to  charge  any  person 
with  the  crime  of  arson  he  is  authorized  to  cause 


747 

such  person  to  be  arrested  and  charged  with  the 
offense.  The  law  further  provides  that  any  owner 
or  occupant  of  buildings  or  premises  failing  to 
comply  with  the  orders  of  the  Marshal  shall  be 
punished  by  a  fine  of  not  less  than  ten  or  more  than 
fifty  dollars  for  each  day's  neglect.  This  law  has 
had  a  very  marked  effect  upon  the  amount  of  fire 
losses  sustained  in  the  State  of  Massachusetts  and 
its  general  adoption  by  other  States  of  the  Union, 
in  my  judgment,  could  not  fail  to  have  a  most  ben- 
eficial result.  The  enactment  of  proper  building 
laws  in  cities  and  towns  where  there  is  a  large  ag- 
gregation of  value,  and  the  rigid  enforcement  of 
them,  would  likewise  tend  to  bring  about  a  consid- 
erable reduction  in  fire  losses.  Whether  the  insur- 
ance companies  would  benefit  by  such  laws  and  the 
results  which  would  follow  them  is  an  open  ques- 
tion. Their  business  is  to  charge  a  rate  of  premium 
adequate  to  the  risks  as  they  find  them,  but  this 
much  is  certain,  that  the  property  owner,  upon 
whom  the  loss  really  falls,  would  be  benefited, 
since  to  the  same  extent  that  a  reduction  of  losses 
could  be  brought  about,  a  reduction  in  the  pre- 
mium charged  for  insurance  would  inevitably  fol- 
low. 

The  foreign  fire  insurance  companies  which  have 
established  branches  in  the  United  States  have 
come  chiefly  from  Great  Britain  and  Germany,  al- 


748 

though  we  have  a  few  welcome  visitors  from  Can- 
ada, Australia,  Switzerland,  Holland  and  Sweden, 
who  have  made  the  requisite  deposits  here,  and 
have  otherwise  conformed  to  the  insurance  laws. 
Several  French  companies  have  made  an  attempt  to 
transact  business  in  the  United  States  also,  among 
them  being  the  ''  Compagnie  de  Reassurances  Gen- 
erales,"  '*  La  Caisse  Generale  des  Assurances  Agri- 
coles  et  des  Assurances  contre  I'lncendie,"  "La 
Confiance  Compagnie  Anonyme  d' Assurances 
contre  I'lncendie,"  and  "La  Metropole  Compagnie 
d' Assurances  Mobilieres  et  Immobilier  a  primes 
fixes  contre  I'lncendie,"  but  so  many  jaws  were 
broken  in  the  effort  to  pronounce  their  names  cor- 
rectly, and  there  being  no  law  by  which  they  could 
be  re-christened,  they  were  persuaded,  after  a  brief 
sojourn,  to  retire.. 

In  no  other  country  in  the  world  have  the  powers 
of  the  underwriter  been  so  hampered  by  legislation 
as  in  the  United  States,  every  discontented  policy- 
holder looking  to  the  Legislature  for  the  redress  of 
his  grievances,  imaginary  or  real.  A  man  in  Vir- 
ginia suffering  from  defective  vision  succeeded  in 
getting  the  enactment  of  a  law  compelling  the  in- 
surance companies  to  print  the  conditions  of  their 
policies  in  a  bolder  and  more  legible  type,  failing 
to  observe  which  the  conditions  were  rendered  null 
and  void.    In  many  of  the  States  there  exist  valued 


749 

policy  laws  which  provide  that  the  sum  insured 
shall  be  regarded  as  proof  of  the  value  of  the  prop- 
erty described  in  and  covered  by  the  policy,  re- 
gardless of  what  its  actual  value  might  be .  An- 
other State  requires  that  not  only  the  conditions  of 
the  policy  but  the  heading  and  all  the  printed  mat- 
ter shall  be  printed  by  all  companies  in  the  same 
type  and  that  the  size  of  the  policy  shall  be  uni- 
form. This  policy  form,  while  valid  in  the  State 
demanding  it,  is  illegal  if  issued  in  a  neighboring 
State.  Many  of  the  States  now  have  what  are  called 
Kesident  Agents'  laws,  under  which  the  company 
is  made  subject  to  certain  pains  and  penalties  for 
writing  a  risk  in  such  State  except  through  an  agent 
resident  in  the  State.  Indeed,  it  requires  of  the 
underwriter  the  proverbial  astuteness  of  a  Phila- 
delphia lawyer  to  determine  what  he  can  and  can- 
not do  under  the  conflicting  laws  of  the  various 
States  as  they  exist  to-day. 

Of  all  the  legislative  enactments  of  recent  years 
the  New  York  Standard  Policy  Act  of  May  1st, 
1886,  stands  solitary  and  alone  as  a  piece  of  legis- 
lation which  has  operated  to  the  advantage  of  both 
insurance  companies  and  insured.  This  form  has 
stood  the  test  of  eleven  years'  experience,  and  has 
proven  to  be  one  of  the  most  perfect  forms  that 
could  have  been  devised.  What  is  good  enough 
for  the  property  owners  and   companies   of  New 


750 

York  ought  to  satisfy  those  of  other  States  as  well, 
and  it  would  remove  a  great  burden  from  the 
shoulders  of  insurance  companies  if  this  form  were 
adopted  throughout  the  United  States.  Divergent 
conditions  in  policy  contracts,  all  of  which  contain 
a  contribution  condition,  are  most  embarrassing  in 
the  apportionment  of  a  loss,  and  the  settlement  of 
this  question  by  the  Legislature,  it  must  be  ad- 
mitted, has  operated  for  the  benefit  of  all  who  are 
interested  in  this  subject.  The  conditions  of 
policies  of  fire  insurance  companies,  while  differing 
in  all  countries  of  the  world,  are  yet  substantially 
the  same.  In  G-reat  Britain,  in  the  absence  of  any 
provision  to  the  contrary,  the  stockholder  of  a  com- 
pany is  an  unlimited  partner,  and  as  such  is  liable 
to  make  good  its  contracts  to  the  full  extent  of  his 
individual  resources,  irrespective  of  the  amount  of 
stock  for  which  he  has  subscribed.  A  company, 
however,  may  be  organized  under  the  Limited  Lia- 
bility Act,  in  which  case  the  liability  of  the  stock- 
holder can  be  limited  to  the  amount  of  his  stock, 
but  when  so  organized  the  company  is  compelled 
to  place  the  word  "limited"  upon  each  policy 
contract,  or  any  renewal  thereof,  in  order  that  the 
party  holding  it  may  have  full  knowledge  of  the 
fact.  In  marked  contrast  to  this  severe  provision, 
designed  for  the  protection  of  policy-holders,  the 
laws  of  the  State  of  New  York  provide  that  a  com- 


751 

pany  may  set  aside  a  portion  of  its  assets,  which 
special  reserve  shall  not  be  liable  for  extraordinary 
conflagrations,  and  which  could  be  utilized  in  con- 
tinuing the  business  of  the  company  even  should 
it  fail  to  meet  its  obligations  in  full.  Several  com- 
panies have  set  apart  such  a  fund  under  the  provi- 
sions of  this  law. 

There  are  no  laws  governing  the  insurance  con- 
tract in  Great  Britain,  each  company  being  free  to 
make  such  a  contract  with  the  property  owner  as 
he  may  be  willing  to  accept,  and  that  contract, 
whatever  its  provisions  may  be,  will  be  sustained 
by  the  courts  of  the  land.  Nor  is  there  any  law 
regulating  the  amount  of  capital  under  which  a 
company  may  transact  business.  It  can  be  large 
or  small,  as  the  company  itself  may  decide  in  its 
interests  that  it  is  expedient  to  expose.  There  is 
nothing  in  the  law,  therefore,  to  prevent  a  com- 
pany which  has  been  legally  organized  from  taking 
an  office,  putting  out  a  sign,  and  writing  all  the 
policies  which  property  owners  will  pay  for, 
whether  its  capital  be  a  hundred  dollars  or  a 
million.  There  we  find  that  the  people,  who  are 
certainly  not  more  intelligent  than  our  own 
citizens,  are  perfectly  able  to  take  care  of  them- 
selves if  left  to  their  own  devices,  and  that  no  law 
is  necessary  to  protect  them  against  their  own  fool- 
ishness.    The  common  law,  and  a  vigorous  enforce- 


752 

ment  of  it,  would  fully  protect  the  insured  from  the 
wiles  of  the  irresponsible  company.  It  could  not 
entice  him  into  its  meshes  by  presenting  a  state- 
ment which  was  false,  since  that  would  be  obtain- 
ing money  under  false  pretenses,  and  as  a  fraud  be 
punishable  as  such.  In  this  country,  I  claim,  we 
are  a  little  too  easy  with  our  malefactors  and  per- 
mit them  to  resort  to  dishonest  practices  without 
instilling  into  their  minds  by  punishment  a  whole- 
some fear  of  the  law.  A  strict  enforcement  of  the 
criminal  code,  which  could  easily  be  brought  about 
when  public  opinion  generally  sustained  it,  would 
be  far  more  effectual  in  preventing  insurance  frauds 
than  any  civil  enactments  devised  for  the  purpose 
of  preventing  them.  Here  our  people  are  taught  to 
look  to  the  insurance  departments  for  protection 
against  the  invasion  of  ''wild  cats"  and  irres- 
ponsible adventurers  who  peddle  "cheap"  insur- 
ance, while  experience  shows  that  notwithstanding 
the  safeguards  provided  by  means  of  State  super- 
vision such  so-called  insurance  companies  will  find 
a  lodgment,  and  that  the  losses  which  the  assured 
make  by  placing  their  insurance  in  such  concerns 
are  far  heavier  than  where  they  are  left  to  take  care 
of  themselves  under  the  protection  of  a  criminal 
law  rigidly  enforced.  In  Great  Britain,  where  this 
freedom  exists,  the  result  proves  that  there  are 
fewer  irresponsible  companies  and  a  smaller  oppor- 


753 

tunity  of  imposing  upon  the  ignorance  of  the 
people  than  here,  where  the  most  elaborate  laws 
exist  for  their  protection.  I  know  of  no  reason 
why  the  property  owner  is  not  just  as  well  qualified 
to  protect  himself  against  a  fraudulent  insurance 
company  as  he  is  against  an  irresponsible  mer- 
chant, and  the  freeing  of  trade  generally,  whether 
it  be  insurance,  banking  or  anything  else,  leaving 
our  citizens  to  control  these  matters  for  them- 
selves in  their  own  way,  would,  I  am  satisfied, 
produce  much  better  results  than  the  most  com- 
plete bureaucratic  system  that  the  ingenuity  of 
man  could  formulate.  If  capital  were  free  to  em- 
bark in  any  enterprise  from  which  a  satisfactory 
return  could  be  reasonably  expected,  there  would 
be  no  need  of  any  law  to  prohibit  combinations, 
for  if  the  rates  of  premium  charged  were  too  high, 
producing  abnormal  profits,  new  capital  would 
soon  step  in  and  compel  their  reduction,  and  no 
combination  of  insurance  companies,  however 
strong,  could  for  any  length  of  time  control  a  busi- 
ness which  could  be  conducted  on  a  lower  scale  of 
rates  and  yet  yield  a  profit. 

Whether,  as  I  have  said,  all  these  legal  enact- 
ments are  in  the  interest  of  the  people  may  well  be 
doubted.  If,  however,  this  system  of  paternalism 
be  continued  the  question  may  fairly  be  asked, 
why  at  least  some  uniformity  in  the  laws  and  the 


754 

methods  of  enforcing  them  by  the  State  authorities 
intrusted  with  this  function  could  not  be  secured  ? 
Under  the  present  system  the  companies  are  em- 
barrassed every  year  by  being  required  to  make  up 
their  statements  in  numberless  different  forms,  and 
when  comparisons  are  made  of  the  statement  filed 
in  one  State  with  that  which  is  filed  in  another  dis- 
parities are  shown  to  exist.  It  seems  to  me  that  as 
the  ostensible  object  of  presenting  these  statements 
is  to  enable  property  owners  to  judge  of  the  sol- 
vency of  the  companies,  it  would  be  sufficient  if  an 
asset  and  liability  statement  alone  were  supplied 
to  them.  What  interest  or  concern  the  public  gen- 
erally have  in  the  income  and  outgo  of  the  com- 
panies I  fail  to  see  so  long  as  the  company  main- 
tains its  solvency.  Each  succeeding  year  appears 
to  bring  out  new  queries  from  various  quarters 
touching  upon  the  internal  economy  of  the  com- 
panies and  with  which  the  people  can  have  no  con- 
cern. The  Insurance  Commissioner  for  the  State  of 
Kansas  sympathizing,  as  doubtless  he  does,  with 
the  troubles  of  the  insurance  companies  and  the 
harrassing  character  of  their  business,  has  appar- 
ently determined  to  see  that  the  salaries  paid  to 
their  officers  are  made  proportionate  to  the 
anxieties  and  difficulties  to  which  they  are  sub- 
jected, and  in  order  to  carry  out  this  philanthropic 
idea  has  called  upon  each  one  of  them  to  give  a  list 


765 

of  tlie  salaries  whicli  they  pay.     While  prompted 
by  the  highest  and  purest  motives,  so  far  as  I  know, 
no  good  result  has  yet  come  from  the  movement — 
at  least  none  has  come  to  me.     Indeed,  it  would 
seem  that  the  officers  of  many  of  our  companies 
had  failed  to  appreciate  the  efforts  made  in  their 
behalf  and  had  resented  the  interference  by  with- 
drawing from  the  State.     The  publication  of  the 
statements  in  their  present  form  seems  calculated 
to  mislead  the  public.     It  is  shown,  for  example, 
in  a  certain  State  that  $10,000,000  in  premiums, 
say,  have  been  collected,  while  losses  amounting 
to  only  $6,500,000  have  been  paid.     The  local  news- 
paper taking  up  thi^  statement  and  commenting 
upon  it  undertakes  to  show  that  the  companies 
have  made  a  profit  of  three  millions  and  a  half  of 
dollars  in  that  State,  forgetting  that  of  this  large 
sum  at  least  $1,500,000  has  been  paid  by  way  of 
commissions  to  agents  resident  in  the  State,  an- 
other $400,000,  more  or  less,    by  way  of  taxes, 
license  fees,  and  other  State  imposts,  and  still  an- 
other $400,000  for  railway  and  other  traveling  ex- 
penses of  special  agents  employed  in  examining 
risks  written  and  in  adjusting  losses  which  have 
occurred,  and  when  all  these  and  other  unavoidable 
charges  incurred  in  the  State  are  deducted  we  find 
a  sum  of  not  more  than  from  five  to  ten  per  cent, 
of  the  receipts  has  gone  to  the  parent  offices  of  the 


756 


companies  for  the  payment  of  their  expenses  and 
for  dividends  upon  the  money  invested  in  the 
business. 

This  question  of  rates  of  premium  has  been  the 
cause  of  continuous  disputes  ever  since  the  day 
that  a  fire  insurance  company  was  first  established. 
At  the  outset,  we  are  told,  a  level  premium  was 
charged  without  regard  to  the  nature  of  the  hazard 
involved,  the  only  difference  that  was  made  being 
caused  by  the  character  of  the  construction  of  the 
building,  whether  it  was  brick  or  wood,  the 
wooden  building  paying  double  the  premium  ap- 
plicable to  the  more  solid  structure.  But  in  course 
of  time,  as  experience  demanded  and  competition 
compelled  it,  rates  were  graded  in  some  proportion 
to  the  hazard  which  attached  to  the  subject  in- 
sured. No  tariff  of  rates,  however,  that  has  ever 
yet  been  framed  has  given  complete  satisfaction  to 
those  who  were  required  to  pay  them,  and  the  in- 
surance company  has  always  been  regarded  as  an 
extortionist  exacting  a  price  for  the  indemnity  far 
beyond  what  it  was  really  worth. 

Some  years  ago  a  carefully  selected  committee 
of  underwriters,  presided  over  by  the  president  of 
one  of  our  leading  companies,  and  upon  whom  the 
labor  chiefly  devolved,  undertook  to  formulate  a 
rating  schedule  applicable  to  the  rating  of  all 
classes  of  hazards,  under  which  it  was  proposed  to 


767 

first  classify  each  city  or  town  according  to  the 
general  construction  of  its  buildings  and  the  pro- 
vision which  had  been  made  for  its  protection  in 
the  way  of  a  water  supply  and  fire  department.  A 
standard  was  then  established  for  a  building,  how- 
ever constructed,  according  to  the  classification  of 
the  town  and  a  uniform  key  or  basis  rate  fixed  for 
each  building.  For  this  basis  rate  a  Dr.  and  Cr. 
account  was  opened,  and  for  each  structural  or 
other  defect  found  a  charge  debited,  and  for  each 
exceptionally  favorable  feature  which  the  building 
presented  a  specific  allowance  was  credited,  the 
net  figure  thus  arrived  at  being  the  rate  for  such 
risk.  This  schedule  has  generally  been  conceded 
to  be  one  of  the  most  scientific  productions  of  this 
underwriting  age,  but  it  was  subject  to  this  serious 
fundamental  objection  that  the  basis  rate  itself  and 
the  debits  and  credits  charged  or  allowed  for  feat- 
ures of  defective  or  superior  construction  were 
after  all  based  upon  judgment,  governed  by  ex- 
perience, rather  than  upon  experience  itself. 
Each  debit  and  each  credit  provided  was  fully 
justified  by  the  hazard  or  reduced  hazard  which 
existed,  but  no  proof  could  be  given  that  the 
charges  or  allowances  mathematically  measured 
the  hazard  to  which  they  applied.  The  best  that 
could  be  said  of  them  was  that  they  represented 
the  collective  judgment  of  the  underwriters.   Upon 


758 

this  schedule,  in  a  more  or  less  modified  form,  our 
present  rates  have  been  made,  and  the  adoption  of 
this  system  has  unquestionably  had  the  effect  of 
reducing  to  a  very  large  extent  the  fire  losses  of 
this  country  and  a  corresponding  reduction  in  the 
premiums  charged  for  insurance.  I  claim,  there- 
fore, that  the  combined  action  of  the  insurance 
companies  in  enforcing  a  system  of  rating  based 
upon  scientific  lines  has  operated,  and  will  con- 
tinue to  operate  to  the  great  advantage  of  property 
owners  in  this  country. 

There  is  no  one,  I  take  it,  not  even  the  most 
rabid  of  our  corporation  haters,  but  who  would 
concede  that  the  insurance  company  was  entitled  to 
charge  a  rate  sufl^cient  to  meet  the  losses  and  the 
expenses  incident  to  the  conduct  of  the  business 
and  yield  a  reasonable  return  upon  the  capital  en- 
gaged  in  it,  but  the  moment  we  come  to  discuss 
that  rate,  differences  of  opinion  arise  as  to  what  it 
should  be,  and  the  company  is  not  in  a  position  to 
demonstrate  to  the  satisfaction  of  the  assured  that 
the  rate  charged  is  not  exorbitant.  Recognizing 
this  fact  the  Commissioner  of  Insurance  for  the 
State  of  Wisconsin  in  his  last  annual  report  laments 
the  absence  of  this  knowledge  in  the  following 
words : 

'*Had  the  business  of  fire  insurance  a  table 
of  experience  made  up  of  the  experience  of  all 


759 

• 
companies,  under  which  the  different  hazards 

were  classified,  it  would  be  comparatively  easy, 
exclusive  of  moral  hazard,  to  approximately 
determine  the  rate  necessary  on  any  given  risk. 
Legislation  has  done  nothing  to  gather  such  an 
experience  table,  and  it  is  to  these  Unions  and 
Associations,  so  generally  condemned,  that  we 
must  look  for  its  creation.      Until  recently  the 
jealous  guarding  of  its  experience    by   each 
company  has  made  this  work  almost  an  impos- 
sibility,  but   by  reason  of  these  associations 
this  work  of  gathering  this  experience  has  re- 
cently been  inaugurated,  and  when  completed 
will  do  more  to  establish  justice  and  equity  in 
rates  than  all  the  anti-compact  laws  ever  en- 
acted or  thought  of." 
These  remarks  have  touched  upon  an  idea  which 
I  myself  have  long  had  in  mind,  and  I  have  decided 
to  take  advantage  of  this  opportunity  to  outline  a 
plan  whereby  the  want  above  indicated  might  be 
supplied.      I  have  already  stated  that  I  do  not  be- 
lieve that  the  controlling  of  fire  insurance  or  any 
other  private  contracts  by  law  is  really  in  the  in- 
terest of  the  people,  but  if,  in  the  exercise  of  their 
good  judgment,  it  shall  continue  to  be  the  policy 
of  our  State  Governments  to  regulate  such  trans- 
actions then  it  seems  to  me  that  the  machinery  of 
our  insurance  departments  might  be  utilized  to 


760 

• 
better  advantage  than  by  collating  statistics  show- 
ing the  premiums  received  the  losses  paid,  and  the 
various  sums  which  are  expended  for  commissions, 
salaries,  taxes  and  other  incidentals  necessary  in 
the  conduct  of  the  business  in  which  the  stock- 
holders of  the  companies  are  alone  concerned,  an 
asset  and  liability  statement  being  really  all  the 
policy -iiolders  need  to  enable  them  to  judge  of  the 
security  upon  which  their  policy  contracts  are 
based.  There  would  be  no  difficulty,  I  apprehend, 
in  preparing  a  classification  of  hazards  which 
should  be  applicable  to  each  State  and  compelling 
each  company  transacting  business  in  the  State  by 
law  to  classify  its  business  in  accordance  with  the 
State  blank,  by  showing  the  sum  insured  in  each 
class  of  hazard  and  the  amount  of  losses  paid  or 
incurred  thereon.  In  this  way  the  experience  of 
each  State  could  be  easily  ascertained,  and  upon 
the  aggregate  results  thus  reached  the  premium 
could  be  assessed,  after  adding  to  the  loss  ratio 
such  a  loading  as  would  cover  the  expenses  of  con- 
ducting the  business.     For  example  : 

If  the  sum  insured  and  in  force  for  any  full  year 
upon  frame  saw  mills  in  the  State  of  Wisconsin 
were,  say,  $5,000,000,  and  the  losses  under  that 
class  were  $100,000  during  the  year,  we  would 
know  that  two  per  cent,  would  represent  the  actual 
loss  cost  on  that  class  for  the  year,  and  if  to  two 


761 

per  cent,   we  should  add    seventy  per  cent,   we 
would  then  arrive  at  the  following  result : 
Sum  assured,  $5,000,000  at  2  per  cent.  + 

70  per  cent.  =  Kate  3. 40= Premium $170, 000 

Losses,  58.82  per  cent $100,000 

Expenses,  34.00  per  cent 57,800 

Profit,  7.18  per  cent .-. . .       12,200 

$170,000 
In  the  carrying  out  of  this  plan  any  policies 
written  for  a  longer  or  shorter  time  than  one  year 
would  have  to  be  so  treated  that  only  such  propor- 
tion of  the  sum  insured  would  be  charged  to  the 
year  dealt  with,  as  the  time  run  during  the  year 
might  bear  to  the  entire  year,  but  this  is  a  matter 
of  detail  into  which  I  need  not  enter.  From  our 
experience  we  know  that  the  business  cannot  be 
conducted  at  a  less  cost  on  the  average  than  34.0 
per  cent.  Indeed,  the  statistics  compiled  by  the 
National  Board  of  Fire  Underwriters  prove  that  the 
average  annual  rate  of  expense  during  the  past 
thirty-eight  years  has  been  34.45  per  cent.  Conse- 
quently, I  claim  that  no  exception  could  be  taken 
to  this  loading  for  expenses,  nor  could  the  ratio  of 
profit— 7.18  per  cent. — be  fairly  criticised,  since 
$1,000,000  of  capital  engaged  in  a  hazardous  busi- 
ness of  this  kind  and  producing  an  income  of  a 
similar  amount,    would  then  receive  but  $71,000 


762 

profit,  whicli  certainly  could  not  be  regarded  as  ex- 
cessive. 

Like  many  other  suggestions  made  for  a  change 
in  existing  methods,  I  assume  that  this  also  will  be 
dubbed  as  crazy  and  impracticable,  but  let  us  see 
whether  at  least  it  might  not  be  worthy  of  some 
consideration.  The  success  of  the  plan,  it  seems  to 
me,  would  depend  upon  two  main  factors,  viz. :  the 
scientific  preparation  of  the  classification  blank  and 
the  correctness  of  the  returns  which  might  be  made 
under  it.  This  blank,  besides  supplying  a  class  for 
every  hazard,  should  also  provide  for  such  a  sub- 
division of  hazards  as  would  enable  the  results  upon 
brick  and  frame  buildings  to  be  shown  separately, 
and  likewise  the  results  upon  such  classes  of  haz- 
ards as  were  under  fire  protection  and  those  which 
were  not.  The  better  the  water  supply  and  the 
more  efiicient  the  fire  department,  the  lower,  as  a 
rule,  will  be  found  the  ratio  of  losses  to  the  value 
of  the  property  at  risk,  and  those  cities  and  towns 
which  have  gone  to  the  expense  of  protecting  their 
property  against  fire  in  this  way  should,  as  indeed 
they  do  now,  receive  the  benefit  of  their  prudence 
and  foresight  by  a  reduced  insurance  rate.  The 
superintendent  or  commissioner  of  insurance,  with 
the  aid  of  a  committee  of  underwriters,  might  easily 
classify  every  town  in  his  State  in  accordance  with 
the  conditions  as  he  found  them.     Such  a  plan 


763 

would  act  as  a  stimulus  to  the  enterprise  of  those 
towns  which  might  desire  to  get  into  a  higher  class 
by  causing  them  to  make  such  an  expenditure  of 
money  in  improving  their  water  supply  and  fire 
departments  as  would  enable  them  to  bring  about 
the  change.  My  plan  would  be  to  cease  this  har- 
assing legislation  prohibiting  combinations  of  com- 
panies from  agreeing  upon  insurance  rates.  No 
one  will  deny  that  the  rate  for  a  given  risk,  or  class 
of  risks,  should  be  founded  upon  experience  ;  and 
yet  when  the  underwriters  get  together  and,  exer- 
cising their  best  judgment,  based  upon  their  col- 
lective experience,  prepare  a  tariff  of  rates,  forth- 
with is  raised  the  cry  of  combination  !  And  then 
the  restricting  powers  of  the  legislature  are  invoked, 
a  so-called  anti-compact  bill  is  introduced  and  en- 
acted, and  the  companies  are  driven  to  resort  to  all 
kinds  of  ignoble  subterfuges  to  discover  some  way 
of  evading  the  law.  That  the  solvency  of  our  com- 
panies is  of  prime  importance  to  the  safety  and  se- 
curity of  the  property  of  our  citizens  goes  without 
saying,  and  that  this  solvency  could  not  be  main- 
tained unless  adequate  rates  were  charged,  must 
also  be  conceded.  It  is  furthermore  beyond  dis- 
pute that  a  rate  which  shall  be  fair  to  both  com- 
pany and  assured  can  only  be  reached  by  utilizing 
the  combined  experience  of  all  the  companies  en- 
gaged in  the  business.      If  property  owners  are 


764 

really  desirous  of  ascertaining  the  exact  loss  cost 
of  the  business  the  method  above  suggested  sup- 
plies a  means.  In  our  bureaux  of  vital  statistics 
we  have  collated  all  that  information  which  is 
necessary  to  show  the  conditions  of  health  and 
longevity  as  they  exist  in  every  town  in  the  country. 
I  know  of  no  reason  why  similar  statistics  could  not 
be  collected  by  the  State  officers  upon  the  subject 
of  fire  losses,  and  thereby  set  at  rest  forever  that 
cry  for  legislation  against  combinations  of  insur- 
ance companies  which  is  raised  all  over  the  land. 
Let  us  know  what  the  loss  cost  is  and  the  rest  will 
be  easy.  With  this  information  before  him  the 
insurance  superintendent  could  make  up  a  tariff  of 
rates  as  well  as  the  most  skillful  underwriter,  and 
when  the  tariff  had  been  made  by  State  authority 
a  law  might  be  passed  providing  that  no  higher 
rates,  including  a  definite  loading,  should  be  ex- 
acted by  combination,  the  companies,  however,  be- 
ing free,  of  course,  to  write  at  the  rate  fixed,  or 
not,  as  their  judgment  might  dictate.  This  is  sub- 
stantially the  method  adopted  by  the  life  insur- 
ance companies  in  making  their  rates.  They  first 
ascertain  from  experience  the  average  expectation 
of  life  on  a  given  number  of  healthy  males  at  cer- 
tain ages,  and  having  determined  this  they  con- 
struct a  table  of  rates  based  upon  a  fixed  rate  of 
interest,  adding  to  these  rates  such  a  loading  as  will 


766 

meet  the  expenses  of  conducting  the  business.  If, 
upon  a  physician's  examination,  the  life  of  any  ap- 
plicant for  insurance  should  be  found  to  be  not 
quite  up  to  standard  an  additional  premium  is 
charged  by  way  of  compensation  for  the  reduced 
period  of  time  he  was  expected  to  live,  but  if  the 
examination  should  indicate  that,  like  some  of  us, 
he  was  threatened  with  an  early  funeral,  the  appli- 
cation would  be  declined  with  thanks.  In  the  prac- 
tical carrying  out  of  such  a  plan,  the  maximum 
State  rate  having  been  fixed  for  each  class  of  fire 
hazards,  the  underwriters  would  construct  their 
tariff  accordingly,  charging  something  less  than 
the  average  rate  for  such  risks  as  might  present 
favorable  features,  as  regards  construction  of 
buildings,  carefulness  of  management  and  protec- 
tion by  fire  extinguishing  appliances  provided  for 
that  purpose,  either  by  the  municipality  or  at  the 
expense  of  the  owner,  while  those  risks  which,  in 
their  judgment,  fell  below  the  average,  would  have 
to  be  penalized  by  a  rate  in  excess  of  the  average 
rate  applicable  to  the  class,  such  excess,  however, 
to  be  determined  by  the  individual  action  of  the 
underwriters  and  not  by  means  of  the  concerted 
action  of  all,  the  State  official  rate  fixing  the  limit 
beyond  which  combination  could  not  go.  At  the 
outset,  doubtless,  my  plan  would  be  ineffective, 
for  the  reason  that  we  would  have  only  the  exper- 


766 

ience  of  one  year  to  determine  the  rate,  but  this 
in  due  time  would  be  remedied  if  provision  were 
made  for  averaging  the  experience  of  each  succes- 
sive year  until  the  first  decade  had  been  passed, 
and  then  striking  off  the  earlier  year  and  substitu- 
ting the  latter  one  in  making  up  the  average. 

If  this  plan  were  adopted  and  the  State  should 
permit  a  combination  of  companies  operating  upon 
this  State  experience  and  making  a  tariff  based 
thereon,  it  seems  to  me  that  no  one  would  have 
any  just  cause  of  complaint.  The  advantage 
would  be  that  every  property  owner  in  the  State 
would  be  interested  in  keeping  the  losses  occurring 
in  the  State  at  as  low  a  point  as  possible,  and  that 
instead  of  utilizing  every  possible  occasion  to 
compel  the  insurance  companies  to  pay  whenever 
a  disputed  case  was  brought  into  Court,  as  is  done 
now,  each  property  owner  would  have  a  direct  in- 
terest in  keeping  the  aggregate  amount  of  losses  as 
low  as  possible,  for  the  reason  that  every  ad- 
ditional dollar  that  was  paid  in  the  State  would 
fractionally  increase  the  rate  of  premium  that  the 
property  owner  would  thereafter  have  to  pay.  A 
combination  to  sustain  prices  is  not  necessarily 
prejudicial  to  the  interests  of  the  people.  It  is  the 
abuse  of  the  power  which  combination  gives  that 
makes  it  harmful  and  indefensible.  To  a  compact 
of  insurance  companies  organized  for  the  purpose 


767 

of  maintaining  uniformity  of  rates  on  the  lines  of 
demonstrated  experience,  no  one  could  reasonably 
object.  That  the  rates  charged  have  not  been  ex- 
cessive on  the  whole  is  demonstrated  by  the  fact 
that  the  statistics  show  that  the  net  profits  of  all 
the  fire  companies  (reporting  to  the  Insurance  De- 
partment of  the  State  of  New  York)  collectively 
during  the  last  seven  years  have  been  only  2.16  per 
cent,  of  the  premiums  received.  "^  There  were 
burned  in  the  United  States  in  1897,  33,033  dwel- 
lings, 913  saloons  and  735  churches,  besides  31,098 
other  buildings,  t  From  this  it  would  appear  that 
the  homes  of  our  citizens  and  the  buildings  in 
which  they  conduct  their  religious  exercises,  as 
well  as  those  in  which  they  take  their  drinks,  are 
alike  exposed  to  the  element  of  fire^  the  loss  by 
whose  ravages  the  insurance  companies  attempt  to 
distribute  over  the  community,  ratably  upon  the 
destructible  property  which  they  individually  pos- 
sess, and  make  a  little  profit  for  themselves. 

Comparison  is  sometimes  made  of  the  relative 
rates  prevailing  in  various  sections  of  the  country, 
and  by  the  uninitiated  the  underwriters  are  some- 
times unjustly  charged  with  unfairness  in  rating 
one  section  higher  than  the  other,  but  it  must  be 

*  National  Board  of  Fire   Underwriters.     President's  Address, 
1898. 
t  The  Clironicle  Fire  Tables.  1898. 


768 

remembered  that  the  climate  is  an  important 
factor  in  determining  the  lire  hazard  and  the  ap- 
propriate rate  for  insuring  against  it.  Certain 
sections  of  this  country,  as  we  know,  are  subject  to 
long  and  continuous  droughts,  and  there  the 
hazard  is  necessarily  greater  and  the  rate  accord- 
ingly higher  than  where  rains  are  constant  and 
abundant.  Again,  the  character  of  the  population 
has  an  important  bearing  upon  this  question  of 
rate.  Certain  sections  of  our  country  are  largely 
settled  by  foreigners  who  have  ''left  their  country 
for  their  country's  good" — a  nomadic  crowd  of 
adventurers  who  seek  to  make  a  living,  honestly, 
if  they  can,  but  make  it,  somehow,  they  must, 
wherever  and  however  they  can  secure  it,  and 
who,  if  occaskion  requires,  will  resort  to  the  torch 
or  any  other  expedient  to  accomplish  their  pur- 
pose. To  this  it  may  be  said  :  Why  not  leave 
such  persons  to  be  insured  by  Lloyds  and  mutuals  ? 
and  so  we  endeavor  to  do,  but  still  we  cannot  rid 
ourselves  of  the  hazard  which  their  presence  occa- 
sions. If  every  risk  were  self-contained  and  the 
hazard  of  fire  attending  it  confined  to  the  limits  en- 
closed within  its  own  walls  the  suggestion  might  be 
a  valid  one,  but  we  know  that  we  may  insure  a  Nico- 
demus — say,  in  Podunk — a  man  spotless  and  with- 
out guile,  and  yet  a  few  doors  away  there  may  live 
a  bohemian  scoundrel  without  means  or  conscience, 


769 

who,  to  serve  his  own  interests,  will  kindle  a  fire  in 
his  own  store  and  burn  a  dozen  of  his  neighbors' 
also.  That  incendiary  cow  in  Chicago  which,  goaded 
to  desperation  by  the  vicious  pinch  of  a  milkmaid, 
kicked  over  a  lamp,  causing  the  loss  of  many  mil- 
lions of  dollars  of  property,  and  those  companies 
which  had  persistently  declined  to  insure  cow 
barns  run  by  revengeful  milkmaids  suffered  equally 
in  the  general  catastrophe  with  those  who  wrote 
them  freely.  I  say  that  locality  and  character  of 
population  are  prime  factors  in  the  determination 
of  the  rate  question.  In  the  mining  centres  of  the 
West,  where  buildings  are  hastily  erected  to  meet 
an  immediate  want  and  to  supply  a  temporary  de- 
mand, rates  of  insurance  must  necessarily  be 
higher  than  in  those  towns  which  have  been  settled 
for  many  years  and  in  which  there  are  permanent 
manufacturing  or  commercial  establishments.  So 
I  say  uniformity  in  rates  all  over  the  country  can- 
not be  expected,  nor  can  any  ever  exist  until  uni- 
formity of  conditions  shall  prevail.  The  highest 
rates  which  are  paid  for  insurance  the  world  over 
exist  in  Russia  and  in  North  America,  if  we  except 
certain  of  the  West  India  and  the  Philippine 
Islands,  where  wooden  structures  largely  abound. 
In  France,  Italy  and  SpaiA  the  lowest  rates  pre- 
vail, the  reasan  being  that  in  these  countries  build- 
ino-s  are  of  massive  construction  and  a  minimum  of 


770 

danger  from  fire  exists.  This  improved  method  of 
construction  is  rapidly  being  introduced  in  this 
country,  and  such  buildings  are  insured  at  as  low 
a  rate  here,  and  in  some  cases  even  lower  than  is 
charged  for  similar  structures  in  Europe.  In  this 
country,  owing  to  the  divergent  conditions  to 
which  I  have  referred,  rates  in  different  sections 
differ  as  widely  as  between  one  country  and 
another.  We  find  from  statistics  supplied  to  us  by 
the  insurance  departments  and  collated  in  "Fire 
Insurance  by  States,"  that  in  the  State  of  New 
York  the  average  annual  loss  on  each  one  hun- 
dred dollars  of  insured  property  during  the  past 
seventeen  years  was  thirty-seven  cents ;  in  Idaho, 
$1.90  ;  in  Texas,  $1.12  ;  in  Massachusetts,  sixty-two 
cents  ;  in  Vermont,  $1.01 ;  in  Wisconsin,  eighty- 
eight  cents,  and  in  Minnesota,  eighty- pight  cents. 
In  1897  the  loss  upon  each  one  hundred  dollars  of 
insured  property  over  the  entire  United  States  was 
fifty  cents ;  in  Canada,  about  seventy-one  cents. 
In  Great  Britain  it  was  about  nine  cents  ;  in  Italy, 
about  six  cents.*  Thus  it  appears  that  the  actual 
losses  on  insured  property  in  the  State  of  New 
York  on  the  average  of  seventeen  years  were  less 
than  one-third  of  what  they  were  in  Texas,  and  in 


*  These  figures  are  approximate  and  are  based  upon  the  expe- 
nce  of  a  few  companies  only,  the  statistics  available  not  supply- 
ing complete  information  upon  this  point. 


OF  THE     '^ 


111 


Massacli  11  setts  less  than  one-third  of  what  they 
were  in  Idaho.  Why  these  differences  ?  Each  of  us 
is  at  liberty  to  form  his  own  conclusions  as  to  the 
cause,  the  results  are  indisputable,  and  with  the 
results  the  underwriter  has  to  deal. 

There  is  one  condition  in  the  insurance  policy 
which  experience  shows  to  be  necessary  in  an  equit- 
able adjustment  of  the  rate,  but  to  which  the  pub-^ 
lie  generally  are  opposed,  because,  it  is  believed, 
of  a  misunderstanding  of  its  real  purpose  and 
necessity.  ~  refer  to  what  is  known  as  the  "  Co- 
insurance Clause."  The  element  of  lire  may  be 
regarded  as  a  burden  placed  by  nature  upon  all  de- 
structible property  and  to  guard  against  which  the 
owner  is  under  the  necessity  of  paying  a  tax  in  the 
shape  of  an  insurance  premium,  unless  he  is  pre- 
pared to  assume  the  risk  himself.  As  collectors 
and  distributors  of  that  tax  an  obligation  rests 
upon  the  insurance  companies  to  levy  it  fairly  and 
equitably.  This,  I  claim,  cannot  be  done  unless- 
the  premium  exacted  is  made  proportionate  to  the 
value  of  the  property  protected.  The  Manufactur- 
ers' Mutuals  in  New  England,  which  were  organ-^ 
ized  for  the  purpose  of  giving  protection  to  their 
associate  members  against  losses  by  fire,  recognized 
at  once  that  there  could  be  no  equal  distribution 
of  the  burden  to  be  borne  unless  the  premium  were 
assessed  upon    a    uniform  valuation.      In    these 


772 

iiiitual  associations  we  have  a  body  of  manufac- 
turers forming  a  co -partnership  with  each  other  for 
the  purpose  of  securing  protection  against  loss  by 
lire  at  the  very  smallest  cost^at  which  such  protec- 
tion could  be  supplied,  and  their  intelligence 
at  once  detected  the  necessity  of  providing  some 
way  by  which  the  premiums  necessary  to  be 
paid  to  secure  the  protection  needed  could  be 
equitably  assessed  upon  each  partner.  Instead, 
however,  of  inserting  a  co-insurance  clause  into 
their  policies  they  had  each  risk  separately 
valued  by  experts,  and  upon  ninety  per  cent,  of 
the  value  thus  ascertained  the  yearly  assessment 
was  made,  a  practice  which  has  been  continued  up 
to  the  present  time.  This  method  of  securing  an 
equitable  assessment  upon  the  property  insured 
could  not  be  carried  out  by  the  insurance  compan- 
ies, for  the  reason  that  the  cost  of  making  the 
valuations  would  almost  equal  the  premium  which 
is  charged  by  the  company  for  assuming  the  risk, 
and,  besides,  the  fluctuating  values  of  merchan- 
dise would  make  such  a  system  impracticable  with 
us.  The  co-insurance  clause,  under  which  the  lia- 
bility of  the  insurance  company  is  limited  to  such 
proportion  of  the  loss  as  the  insurance  bears  to  the 
value  of  the  property  insured,  substantially  pro- 
duces the  same  result.  It  leaves  the  assured  free 
to  carry  as  much  or  as  little  insurance  as  he  deeiris 


773 

needful,  but  it  fixes  the  proportion  of  the  loss  re- 
coverable from  the  company  in  the  event  of  fire  to 
such  as  the  insured  has  chosen  to  pay  for.  If  he 
insures  for  one-half  of  the  value,  he  recovers  one- 
half  of  the  loss,  be  it  partial  or  total ;  if  the  whole 
of  the  value,  the  whole  of  the  loss.  There  is,  and 
can  be,  no  inequity  in  this.  The  practical  effect  of 
any  law,  indeed,  which  prohibits  the  use  of  this 
clause  is  in  the  interest  of  the  plutocrat  rather 
than  in  that  of  the  man  of  moderate  means,  since 
the  former  can  afford  to  take  chances  which  the  lat- 
ter cannot,  and  the  rate  of  premium  being  based 
upon  general  experience  the  wealthy  property 
owner  who  under-insures  his  property  does  so  at 
the  expense  of  the  poorer  man  whom  necessity 
compels  to  protect  it  for  its  full  value.  It  is  be- 
lieved that  the  universal  adoption  of  the  co-insur- 
ance clause,  as  in  Germany  and  France,  and 
largely  in  Great  Britain  also,  would  enable  the 
companies  to  concede  an  average  reduction  in  the 
rates  now  current  of  not  less  than  ten  per  cent. — 
an  advantage  which  would  accrue  chiefly  to  the 
poorer  classes  of  the  insured.  In  several  States  of 
the  United  States  the  use  of  this  m^ost  equitable 
condition  is  prohibited  by  law. 

From  what  has  been  stated  it  will  appear  that 
substantial  equality  of  treatment  for  both  native 
and  foreign  companies  exist  the  world  over,  in  the 


774 

privileges  enjoyed  and  in  the  burdens  to  be  borne. 
They  ask  no  more  ;  they  deserve  no  less.  The  for- 
eign company,  by  which  I  mean  that  company 
only  which  enjoys  an  international  reputation, 
adapts  itself  to  all  these  varying  requirements. 
Loyally  observing  the  laws  wherever  it  plants  its 
Hag,  it  pursues  its  business  under  the  conditions 
as  they  exist.  It  makes  a  deposit  where  a  deposit 
is  required,  and  when  discouraged  by  the  results 
of  its  venture  it  withdraws  and  gets  its  money 
back — if  it  can.  AVherever  the  merchant  takes  his 
property  there  it  follows  to  protect  it,  recognizing 
that  its  mission  is  to  supply  that  necessary  in- 
demnity at  the  lowest  possible  cost  consistent  with 
safety.  In  the  large  cities  of  the  world,  where  the 
amount  of  business  justifies  it,  it  establishes 
branches  managed  by  competent  underwriters. 
Where  the  business  is  limited  it  apiDoints  as  its 
agent  a  leading  merchant,  regardless  of  nation- 
ality, whose  standing  inspires  the  respect  and  con- 
fidence of  the  community,  and  to  him  it  grants 
authority  by  power  of  attorney  to  issue  policies,  to 
adjust  losses  and  to  draw  upon  the  parent  office 
for  such  sums  as  may  be  needed  to  meet  its  losses, 
which  drafts  are  readily  cashed  by  the  local  banks. 
By  so  doing  it  supplies  to  resident  property 
owners  all  the  advantages  of  a  local  institution 
supplemented  by  the  security  of    its  entire  re- 


775 

sources  wMcli  are  thereby  made  immediately 
available  at  the  place  where  the  cash  is  needed. 
Year  by  year,  as  the  results  of  its  business  permit 
it,  it  is  continually  strengthening  its  reserves. 
Where  there  are  native  companies  it  co-operates 
with  them  in  sustaining  safe  and  correct  practices 
in  underwriting.  Where  the  policies  of  such  native 
companies  are  preferred  it  aids  them  by  way  of  re- 
insurance, and  where,  on  the  other  hand,  its  policies 
are  given  the  preference  it  shares  with  the  native 
companies  such  surplus  lines  as  it  does  not  deem 
it  prudent  to  retain.  In  the  adjustment  of  losses 
it  takes  no  advantage  of  technical  breaches  of  the 
contract,  but  meets  honest  claims  from  the  stand- 
point of  equity  and  fairness.  There  is  scarcely 
any  town  in  the  civilized  world  in  which  it  is  not 
transacting  business  in  some  form  or  other,  di- 
rectly or  indirectly.  Its  ambition  knows  no  limit. 
It  is  always  reaching  to  a  higher  level,  and  while 
periodical  conflagrations  temporarily  deplete  its 
funds,  its  surplus  goes  on  increasing.  It  never 
rests  satisfied.  Some  stigmatize  this  as  greed,  I 
prefer  to  call  it  enterprise.  In  this  country  the 
returns  show  that  it  enjoys  in  a  marked  degree  the 
confidence  of  the  people,  and  after  fifty  years  of 
trading,  involving  transactions  of  hundreds  of  mil- 
lions of  dollars,  it  can  be  truthfully  averred  that 
no  property  owner  in  the  United  States  has  yet 


776 

lost  a  single  dollar  of  that  to  which  he  was  entitled 
under  any  policy  issued  by  a  foreign  insurance 
company  regularly  admitted  to  do  business  within 
its  borders. 

Such  is  the  foreign  fire  insurance  company, 
and  such  its  business^  methods. 


ELIJAH  R.  KENNEDY  : 

My  discussion  of  Mr.  Beddall's  topic  will  have 
reference  to  his  entire  paper,  which  I  have  been 
privileged  to  read,  rather  than  the  very  small  por- 
tion of  it  which  you  have  been  permitted  to  hear.  It 
is  the  most  important  paper  which  was  ever  pre- 
pared on  the  topic.  It  contains  the  only  complete 
compendium  of  the  methods  of  foreign  fire  insur- 
ance companies  as  controlled  by  the  legislation  of 
various  countries,  and  of  the  business  methods 
voluntarily^  adopted  by  the  various  offices,  and  it 
deserves  a  place  in  the  next  edition  of  the  Encyclo- 
pedia Britannica,  where  we  look  for  thoroiiiili 
treatises  on  such  subjects.  I  have  generally  to 
agree  with  my  friend  Mr.  Beddall  in  what  he  has 
written  in  his  paper,  but  as  you  have  not  heard 
much  of  it  I  have  the  opportunity  to  bring  out 
some  of  its  points. 


777 

I  deduce  from  the  paper  that  a  foreign  company 
operating  the  world  over,  and  engaging  in  each 
country  the  ablest  staff  that  it  can  for  that  coun- 
try, derives  thus  the  advantage  of  a  miscellaneous, 
cosmopolitan,  world-wide  experience  which  makes 
the  head  managers  of  foreign  companies,  not  more 
able,  but  of  broader  experience  than  the  managers 
of  American  companies,  who  have  so  far  been  con- 
tented to  confine  their  business  operations  to  their 
own  country. 

Another  point  that  I  deduce  from  Mr.  Beddall's 
paper  is  that  the  usual  taxation  of  the  fire  insur- 
ance business  is  not  so  high  in  most  countries  as  it 
is  in  this.  Scarcely  anywhere,  except  in  Russia 
and  the  United  States,  do  the  tax  laws  discriminate 
against  foreign  companies.  IS'owhere  is  a  foreign 
company  subject  to  more  arbitrary  laws  or  despotic 
administration  than  in  the  United  States.  These, 
gentlemen,  I  assure  you,  are  fair  deductions  from 
the  painstaking  and  exhaustive  treatise  which  Mr. 
Beddall  has  printed,  giving  us  a  summary  of  the 
laws  of  all  the  civilized  countries  of  the  world. 
Only  in  some  American  States,  among  them  New 
York,  does  the  government  undertake  to  prevent  a 
foreign  fire  insurance  company  from  availing  itself 
of  the  protection  of  courts  created  especially  to 
consider  disputes  between  citizens  of  different 
States.     New  York  does  not' attempt  a  straightfor- 


778 

ward  prohibition  of  an  appeal  to  Federal  courts ; 
the  unconstitutionality  of  such  an  enactment  would 
soon  render  it  void  ;  but,  with  discreditable  in- 
genuity, it  requires  the  foreign  company,  as  a  con- 
dition of  its  being  licensed  to  do  business  in  the 
State,  to  stipulate  that  it  will  forego  the  exercise 
of  the  right  guaranteed  to  all  persons  by  the  Con- 
stitution of  the  United  States.  No  such  condition 
is  required  of  companies  of  other  States,  and  even 
in  New  York  this  stipulation  is  demanded  only  of 
foreign  companies  admitted  subsequent  to  1880. 

Only  in  some  of  the  American  States  is  a  foreign 
company  doing  business  the  world  over  compelled 
by  law  to  pay  to  policy-holders  in  some  cases  more 
than  the  value  of  their  insured  property  destroyed 
by  fire.  Mr.  Beddall's  researches  show  that  every 
other  government  provides,  as,  indeed,  do  most  of 
our  own  States,  that  property  owners  may  not  col- 
lect, as  the  result  of  fire,  more  than  the  value  of 
property  destroyed.  The  philosophy  that  would 
make  death  welcome  in  its  relation  to  life  insur- 
ance, and  a  shipwreck  a  beneficence  in  its  relation 
to  marine  insurance,  is  identical  with  the  principle, 
incorporated  in  the  laws  of  several  American 
States,  that  a  fire  is  a  wholesome  and  welcome  oc- 
currence and  that  the  man  whose  carelessness,  ne- 
glect, or  crime  causes  it  is  to  be  rewarded  by  a  pay- 
ment in  excess  of  his  actual  damage.    The  foreign 


779 

company  finds  in  other  lands  that  wilful  destruc- 
tion of  property  is  discouraged  by  law.  In  these 
several  American  States  I  have  been  referring  to  it 
is  compelled  to  adapt  its  business  methods  to 
exactly  the  opposite  principle  of  legislation. 

In  the  entire  world  the  only  place  where  the 
law  requires  one  company  to  pay,  not  only  its  own 
losses,  but,  in  certain  events,  the  losses  of  another 
company,  is  an  American  State.  The  strong  for- 
eign company  receives  no  premium  for  thus  guar- 
anteeing the  solvency  of  another  company.  It  is 
not  even  allowed  the  right  of  choice  as  to  com- 
j)anies  whose  policies  it  must  thus  guarantee.  As 
between  reliable  honest  solvent  companies  and 
dishonest  unreliable  insolvent  companies,  such  a 
law  is  absolutely  in  the  interest  of  the  latter  class 
and  is  unjust  and  oppressive  to  the  former. 

Mr.  BeddalFs  paper  arrays,  in  an  impressive 
manner,  the  mass  of  inconsistent,  incongruous, 
vexatious  statutes  to  which  a  foreign  company 
must  bend  in  doing  business  in  the  United  States 
To  some  extent  there  is  the  same  perplexing 
diversity  of  laws  regulating  other  matters,  notably 
in  respect  of  marriage  and  divorce.  A  man  may 
be  lawfully  married  in  New  Jersey,  where  he  makes 
his  domicile,  but  when  he  crosses  the  ferry  to  New 
York  City  to  attend  to  his  business  he  may  find 
himself  by  the  law  of  New  York  a  bigamist  or  an 


780 

adulterer.  This  anomalous  condition  of  our  laws 
in  respect  to  several  subjects  has  received  much 
attention  from  jurists  and  statesmen,  but,  so  far 
without  any  relief,  and  the  rectification  and  as- 
similation  of  insurance  statutes,  to  which  Mr.  Carr 
referred  with  a  felicity  and  cogency  which  make 
it  unnecessary  for  me  to  further  discuss  the  matter, 
might  well  furnish  a  national  convention  of  the 
importance  and  influence  of  this  with  a  theme  to 
engage  its  attention  until  it  had  mastered  the  task. 
For  the  present  condition  of  insurance  methods  as 
regulated  and  obstructed  by  law  is  one  of  difficulty 
and  danger  to  the  honest  and  the  unsuspecting, 
while  it  is  one  of  opportunity  and  advantage  to  il- 
legitimate and  clandestine  operators.  Let  me  re- 
fer to  one  instance,  that  of  the  miscreants  named 
Anthony,  who  have  for  about  twenty  years  preyed 
upon  those  ready  to  buy  cheap  and  nasty  insur- 
ance all  over  the  country.  Father  and  son  have 
kept  their  place  of  business  during  all  this  time  in 
the  city  of  Brooklyn.  They  have  robbed  premium 
payers  in  every  State  in  the  Union,  not  excepting 
their  own  State.  Insurance  Superintendents  from 
several  States  have  endeavored  to  suppress  them, 
and  yet  no  State  nor  all  of  them— not  even  the  Em- 
pire State  with  its  great  power  of  administration, 
has  been  able  to  seriously  hinder  or  check  the 
scoundrelly  operations  of  these  men  who  have  been 


781 

selling  policies  of  alleged  companies  that  never 
had  even  corporate  existence — names  on  policies  of 
things  that  were  alleged  to  be  companies  but  that 
were  not  companies.  One  New  York  Superintend- 
ent did  get  one  Anthony  into  jail  for  thirty  days, 
and  I  believe  he  was  once  locked  up  for  a  short 
period  in  New  Jersey  ;  but  at  last,  State  supervis- 
ion having  failed  to  prevent  the  continuance  of  his 
business,  the  surviving  scoundrel  has  been  arrested 
for  fraudulent  use  of  the  United  States  mails  in 
sending  his  circulars  and  documents  and  alleged 
policies  around  the  country. 

While  I  shall  adhere  to  my  promise  not  to  go 
over  the  ground  so  well  covered  by  Mr.  Carr,  the 
matter  of  the  assimilation  of  insurance  laws  is  so 
extremely  important  that  I  will  venture  upon  a 
suggestion  or  two.  In  the  first  place,  then,  let  me 
say  that  I  believe  no  such  general  codification  can 
be  made  with  the  best  results  unless  those  who  are 
to  administer  the  law  are  assisted  in  their  task  by 
those  who  are  to  be  most  directly  affected  by  the 
law,  namely  the  fire  underwriters  themselves  ;  and 
as  not  all  insurance  superintendents  are  themselves 
lawyers  it  seems  to  me  that  men  of  the  highest 
standing  in  the  legal  profession,  men  especially 
familiar  with  adjudicated  insurance  law,  ought  to 
be  retained  for  such  conferences  as  would  be  neces- 
sary in  completing  the  great  task  outlined  by  Mr. 


782 

CaiT.  When  the  insurance  enactments  of  Nevr 
York  during  a  long  period  of  years  were  being 
brought  together,  assimilated,  and  codified  a  few- 
years  age,  the  New  York  Board  of  Fire  Under- 
writers instructed  its  proper  committee  to  assist 
the  State  Commissioners  on  codification.  The 
committee  retained  a  lawyer  pre-eminent  for  his 
learning  in  the  law  of  our  business,  and  the  assist- 
ance we  gave  to  the  State  Commission  was  very 
generously  recognized  by  the  Commissioners.  I 
have  no  hesitation  in  saying  that  if  your  conven- 
tion, or  your  association,  will  take  up  this  matter 
in  the  spirit  of  Mr.  Carr's  suggestion,  the  under- 
writers will  meet  you  in  entire  good  faith  and  will 
lend  you  practical  and  well-informed  assistance. 

Mr.  Beddall  has  referred  to  the  indubitable 
benefits  that  have  been  conferred  upon  the  com- 
munity by  the  adoption,  first  in  New  York  and 
subsequently  in  a  number  of  other  States,  of  a 
just  and  equitable  standard  form  of  policy.  I  read 
Mr.  Beddall' s  remarks  upon  that  subject  with  some 
personal  pride,  I  confess,  because  I  had  the  honor 
to  be  chairman  of  the  commission  that  made  that 
policy,  and  the  gentleman  whom  we  in  New  York 
are  accustomed  to  look  upon  as  the  leading  fire  in- 
surance lawyer  of  the  United  States  told  me  that 
he  never  did  for  himself  so  unprofitable  a  summer's- 
work  as  to  advise  us  conc^jrning  what  was  law  ancL 


783 

what  was  not  law  in  the  preparation  of  that  policy, 
for  the  policy,  he  said,  had  well  nigh  abolished 
misunderstandings  and  consequent  litigation  be- 
tween the  insured  and  the  companies  wherever  the 
policy  was  used.  Now,  if  the  adoption  in  some 
States  of  a  standard  form  of  equitable  policy  could 
effect  such  a  desirable  result,  why  would  it  not  be 
well  for  the  insurance  commissioners  of  the  United 
States  to  do  as  the  State  of  New  York  did  when 
this  policy  was  adopted  and  to  co-operate  in  an  en- 
deavor to  establish  a  uniform  and  just  method  of 
government  and  administration  concerning  fire  in- 
surance ?  I  think  it  is  well  that  Mr.  President  Carr 
h  taken  some  alarm  at,  not  only  the  diversity, 
but  at  the  effects  arising  from  the  diversity  and 
the  incongruity,  severity,  and  absurdity  of  much 
of  the  State  legislation  and  administration.  Doubt- 
less the  present  effort  for  a  national  bureau  of 
supervision  will  fail,  but  you  may  rest  assured, 
gentlemen,  if  State  supervision  does  not  improve — 
and  State  legislation,  upon  which  supervision  is 
necessarily  based — something,  and  perhaps  National 
supervision,  will  have  to  be  substituted  for  them. 

I  want,  however,  to  give  you  a  word  of  caution 
before  you  begin  such  a  salutary  reform  as  we  are 
now  considering.  Don't  give  us  too  many  laws. 
Don't  incorporate  in  your  code  for  all  the  States 
every   freak  provision  you  may  find   when   you 


784 

scrape  together  the  mass  of  statutes  of  each  State  ; 
for  I  do  not  hesitate  to  declare  that  most  States 
have  too  many  insurance  laws  and  several  States 
have  some  very  bad  laws.  I  have  no  personal  ap- 
plication in  mind.  Those  of  you  with  whom  I  am 
acquainted  will  certainly  acquit  me  of  a  desire,  or 
even  a  willingness,  to  condemn  your  intelligence, 
your  fidelity,  or  your  zeal,  in  the  administration  of 
your  offices.  And  those  of  you  who  know  me 
best  will,  I  think,  justify  my  declaration  that  I 
personally  have  no  complaint  to  make  of  the  ad- 
ministration of  insurance  laws.  I  am  discussing  a 
system  and  its  gradual  development  and  present 
conditions — a  system  that  has  been  largely  created 
and  fostered  by  your  predecessors.  Let  me  say, 
then,  that  your  laws  and  your  system  have  already 
gone  far  beyond  the  reasonable  purpose  of  govern- 
ment supervision  of  our  business.  Just  now,  and 
represented  in  this  convention,  there  are  States  that 
want  to  tell  us  exactly  how  we  shall  do  the  busi- 
ness which  we  have  studied  all  our  lives.  Superin- 
tendents who  never  wrote  a  policy,  who  never 
inspected  a  risk,  who  never  stood  up  against 
the  desperate  rivalries  of  competing  agents, 
who  never  had  any  experience  in  our 
business,  with  companies  or  witli  the  people 
whose  credit  depends  upon  their  procuring  fire  in- 
surance, have  undertaken  to  direct  just  how  we 


785 

shall  and  shall  not  carry  on  our  affairs.     I  believe 
you  have  not  trenched  so  far  upon  life  insurance 
management,  or  marine,  or  any  other  branch  ;  but 
State  supervision  has  entered  so  far  into  the  regu- 
lation of  our  working  methods  that  you  appear  to 
have  overlooked  the  first  and  proper  function  of 
supervision,  and  have  neglected  to  prevent  insol- 
vent companies  from  preying  upon  your  people. 
While  weak  companies  have  been  allowed  to  go  on 
unhindered,  strong  companies  have  been  hampered 
and  vexed  and  annoyed  and  restricted  in  the  nat- 
ural outworking  of  business  enterprise  and  energy 
and  strength.     You  have  become  so  accustomed  to 
supervision  beyond  its  proper  field  that  suggestions 
for  the  restriction  of  competition,  for  limiting  and 
actually  diminishing  the  supply  of  insurance,  for 
"restraint  of  trade,''  for  confining  the  enterprising 
to  business  methods  satisfactory  only  to  those  en- 
tirely lacking  enterprise,  for  arraying  the  taxing 
power  of  government  on  one  side  in  the  active 
rivalry  of  companies  ;  that  proposals  to  still  further 
meddle    with     business     methods    approved    by 
the  wisest  and  the  strongest  companies — sugges- 
tions originating  in  the  minds  of  excited  rivals — are 
complacently  and  patiently  discussed  as  though 
they  could  be  the  proper  subject  of  laws.     You 
have  become  so  accustomed  to  the  idea  that  every 
complaint  uttered  by  certain  companies  and  agents 


786 

against  other  and  just  as  good  companies  and 
other  and  equally  good  agents  should  be  instantly 
cured  by  legislation  and  administrative  interfer 
ence,  that  requests  which  ought  to  receive  no  at- 
tention except  resentment  are  considerately  enter- 
tained and  too  often  granted,  and  your  great 
influence  upon  legislation  is  dragged  into  business 
disputes  far  below  the  proper  stand  which  insur- 
ance supervision  ought  to  take. 

Mr.  Beddall's  compilations  show  that  only  in 
Russia  and  one  or  two  other  countries  of  kindred 
character  is  anything  found  in  insurance  law  or  ad- 
ministration resembling  our  so-called  ''discretion- 
ary power."  Nothing  like  this  despotic  power  has 
been  conferred  on  any  officer  or  magistrate  of  this 
country  in  any  other  department  of  government  or 
as  touching  any  other  business  interest.  The 
chief  executive  of  a  State  may  restore  rights  to  a 
man  who  has  forfeited  them  by  crime,  but  the  in- 
surance superintendent  appointed  by  that  governor 
may  deprive  a  fire  insurance  company  of  everything 
it  has  gained  by  the  investment  of  large  capital  ex- 
clusively for  the  protection  of  the  policy-holders  it 
has  in  that  State,  by  close  compliance  with  every 
law,  and  by  most  honorable  business  methods, 
merely  by  declaring  that  in  his  judgment  the  pub- 
lic interest  would  be  thus  served.  From  such  ab- 
solute decision  there  is  no  appeal  whatever  to  court 


787 

or  other  department  of  government.  The  Anglo- 
Saxon  principle  that  every  man  is  entitled  to  his 
day  in  court  is  thus  rendered  of  no  value  in  respect 
to  a  foreign  insurance  company.  The  law  of  every 
State  gives  every  other  party,  personal  or  incorpor- 
ate, this  right  to  his  day  in  court.  But  the  foreign 
fire  insurance  company  may  at  any  moment  see  its 
business  annihilated  at  one  swoop  by  the  exercise 
of  this  "discretionary  power." 

Some  little  knowledge  of  business  methods  ap- 
plied to  Mr.  Beddall's  statement  of  legal  prohibi- 
tions warrants  me  in  declaring  to  you  that  rates 
are  lowest,  generally,  and  the  business  is  done 
most  satisfactorily  to  the  public,  where  legal  hin- 
drances are  fewest  and  law  and  administration  offer 
least  obstacles  to  the  principles  and  methods  of  fire 
underwriting  voluntarily  adopted  by  fire  underwrit- 
ers. This  convention  does  not  need  argument  to 
perceive  the  obvious  inference  from  such  a  state- 
ment.. Where  laws  and  administration  have  been 
hostile  to  the  companies  the  companies  have  been 
compelled,  and  have  generally  been  able,  to  recoup 
themselves  out  of  the  premium  payers  for  the  bur- 
dens inflicted  by  unfriendly  statutes  and  despotic 
superintendents. 

Now,  I  do  not  go  with  Mr.  Beddall  to  the  length 
of  saying  that  the  insurance  business  should  be  as 
free  as  the  grocery  trade.     The  Almighty  made 


788 

grocers,  and  if  they  sell  us  wilted  vegetables  and 
adulterated  sugar  He  will  probably  take  care  of 
them  in  His  own  way  and  in  His  own  time,  albeit 
the  State  undertakes  to  assist  the  Almighty  with 
considerable  machinery  for  the  punishment  of  mal- 
efactors. But  the  State,  having  created  these  arti- 
ficial persons  called  corporations,  and  among  them 
fire  insurance  companies,  has,  it  seems  to  me,  not 
only  the  right,  but  the  duty,  to  keep  an  eye  upon 
their  operations.  I  do  not  mean  an  eye  and  a  fist, 
with  perhaps  the  addition  of  a  bludgeon. 

Now,  in  respect  of  business  methods  of  foreign 
companies  such  as  are  adopted  by  the  free  will  of 
the  managers  and  are  not  enforced  by  government, 
I  may  mention  a  few  particulars.  It  is  common  in 
the  United  States  for  American  companies  to  com- 
pete not  only  with  other  companies,  but  with  them- 
selves. I  am  told  that  in  one  American  city  one 
company  has  a  hundred  agents,  each  going  about 
telling  people  how  much  better  and  cheaper  he  can 
procure  their  insurance  than  anybody  else.  Thus  the 
normal  and  wholesome  competition  which  should 
be  relied  on  between  companies  has  been  rendered 
abnormal  by  the  creation  of  an  army  of  parasites 
all  endeavoring  to  make  their  living  out  of  premium 
payers  to  one  company,  when  one  agent  with  a  few 
solicitors  would  do  the  work  better  and  very  much 
cheaper.     Multiple    agencies    are    absolutely  uu- 


789 

known  to  the  business  methods  of  foreign  com- 
panies excei)t  when  those  companies  have  to  come 
into  competition  with  some  American  companies 
on  their  home  field.  This  feature  of  excessive 
competition,  I  repeat,  is  a  nuisance,  with  absolutely 
no  good  public  result,  but  with  the  effect  of  finally 
diminishing  and  destroying  many  of  the  competi- 
tors. 

It  is  the  common  practice  of  foreign  companies 
in  their  home  fields  to  write  large  lines  upon  single 
risks,  often,  indeed,  the  entire  value  of  properties 
such  as  hotels,  dwellings,  palaces,  warehouses,  and 
factories,  and  to  diminish  the  actual  risk  which 
they  carry  by  dividing  the  amounts  of  their  poli- 
cies among  neighboring  companies  in  the  way  of 
re-insurance.  This  enables  competition  to  be  ap- 
plied in  a  large  way,  and  at  the  same  time  culti- 
vates a  friendly  reciprocity  of  patronage  among 
competitors.  It  justifies  a  policy-holder  in  giving 
to  his  insurance  the  time  necessary  to  deal  direct 
with  the  underwriter,  whether  at  a  head  office  or  at 
a  branch  ofiice  conducted  by  a  thoroughly  respected 
and  competent  manager,  and  relieves  him  of  the 
necessity  which  he  is  under  in  this  country  of  em- 
ploying a  broker  or  middleman,  or  whatever  you 
may  denominate  him,  to  divide  his  insurance 
around  in  scores  of  small  policies.  The  foreign 
method,  moreover,  adds  dignity  as  well  as  emolu- 


790 

ment  to  the  tvork  of  the  local  agent  or  branch  man- 
ager, and  i^  to  the  best  interest  of  all  concerned — 
thoroughly  better  than  the  American  method  of 
doing  a  puttering  retail  trade  where    wholesale 
would  be  more  convenient.     I  say  it  adds  to  the 
dignity  and  to  the  emolument  of  the  local  agent, 
just  as  the  seller  of  a  case  of  calicoes  is  a  more  im- 
portaut  salesman  than  the  counter  jumper  who 
measures  off  a  few  yards.     Opposition  to  the  prac- 
tice of  re-insuring  portions  of  lines  has  been  engen- 
dered in  some  States,  but  I  venture  to  assert  that 
this  opposition  has  been  based,  in  the  first  instance, 
upon  a  supposed  but  mistaken  consideration  of  the 
interests   of    certain    local   agents   who    did    not 
happen    to    be    the    fortunate    men    who    could 
write    the    large    lines,    and    that    where    such 
opposition    has    been    taken    up    by    the    State 
the  subject    has  never   yet    been  thought   upon 
fairly    in    its   relation  to  the    public    advantage 
and  welfare.     The  attemj)t  to  thus  forbid  re-insur- 
ance has  been  made  in  New  York  State,  but  the 
legislature  and  the  insurance  department  have  so 
far  taken  the  side  of  the  merchants  and  manufac- 
turers, and  succeeded  in  defeating  the  attempt  to 
secure  the  enactment  of  laws  in  restraint  of  trade. 
Provided  a  company  insures  no  more  on  a  certain 
risk  than  it  is  permitted  by  your  laws  to  insure  ; 
provided  it  carries  no  more  at  risk  on  one  property 


791 

than  the  proportion  of  its  available  assets  which 
the  consensus  of  the  laws  of  the  various  States  ap- 
proves ;  why  should  any  State  forbid  such  a  com- 
pany to  reinforce  its  policy  by  the  policy  of  another 
company  which  may  agree  to  pay  a  share  of  its 
loss  in  the  event  of  fire?  Such  re-insurance,  by 
another  company,  of  the  original  underwriter  is 
like  the  endorsement  of  commercial  paper.  Would 
a  bank  that  was  willing  'to  discount  a  note  for 
$10,000  on  the  name  of  its  maker  object  to  having 
a  good  endorsement  without  additional  cost  ? 
And  yet  this  endorsement  is  exactly  analogous  to 
a  policy  of  re-insurance.  Mind  you,  the  original 
underwriter  is  compelled  by  your  laws  to  maintain, 
in  the  hands  of  the  trustees  appointed  to  protect 
the  rights  of  policy-holders,  an  unearned  premium 
fund  based  upon  the  gross  x^remium  on  the  policy 
without  any  consideration  of  re-insurance,  thus 
giving  the  policy-holder  the  double  i^rotection  of 
the  funds  held  by  such  trustees  and  of  the  funds 
which  the  original  company  may  be  able  to  de- 
mand from  its  re-insuring  company,  and,  further, 
the  original  company  is  required  by  your  laws  to 
pay  its  taxes  upon  premium  and  its  taxes  upon 
assets  based  upon  the  premium  without  regard  for 
the  fact  that  part  of  its  risk  has  been  re-insured. 

I     regard    Commissioner    Fricke's    suggestion, 
which  Mr.   Beddall  has  so  ably  expounded  and 


792 

discussed  according  to  his  own  ideas,  as  the  most 
important  that  has  been  made  for  the  benefit  of 
the  fire  insurance  business  in  the  United  States  in 
many  years,  and  I  agree  with  Commissioner  Fricke 
in  regarding  it  as  possible  and  reasonable  to  re- 
quire from  the  companies  such  statements  of  their 
losses  on  certain  classes  of  physical  hazards  as  to 
render  it  practicable  for  the  State  to  compile  such 
data  as  is  done  now  in  mortality  tables  for  the  life 
insurance  companies.    A  state  that  can  extort  from 
a  fire  insurance  company  all  the  facts  that  your 
annual  statements  require,  and  receive,  including 
the    "loss  and  gain"    affair  that  brother    Betts 
finally  triumphed  in,  can  get  anything,  and  cer- 
tainly can  get  from  the  companies  a  clear  showing 
of  their  losses  upon  certain  kinds  of  business  that 
will  enable,  by  comparison  with  other  States,  the 
results  which  Mr.  Beddall  has  so  ably  outlined,  to 
be  arranged  and  tabulated  and  promulgated,  and 
to  thus,  for  the  first  time,  establish  an  accurate 
basis  for  the  making  of  rates. 

I  dissent  from  Mr.  BeddalP  s  suggestion  that  even 
an  insurance  superintendent  could  ma:ke  a  good 
tariff  of  rates  with  such  data  as  are  proposed.  It 
is  about  the  worst  thing  I  ever  heard.  Gentlemen, 
the  greatest  mistakes  are  made  by  our  greatest 
men.  You  give  us  the  mortality  table  of  saw  mills 
that  you  give  the  life  insurance  companies  of  men 


793 

forty-two  years  old  and  we  will  make  fair  and  com- 
petitive rates  on  saw  mills,  just  as  life  insurance 
companies  make  rates  on  men  forty  two  years  old, 
and  we  will  make  them  so  low  that  only  economi- 
cally managed  companies  can  exist  and  write  at 
those  rates,  and  the  inexorable  law  called  "  sur- 
/ival  of  the  fittest  "  will  then  assume  its  proper 
relation  to  our  great  business.  I  suspect  that  rates 
Tiade  by  State  authority,  and  especially  by  a  rate 
making  superintendent  dependent  for  his  position 
ipon  popular  vote,  would  not  have  reference  so 
nuch  to  the  fair  and  equitable  rights  of  stock- 
jolders  whose  money  is  at  risk  in  the  just  expecta- 
tion of  earning  reasonable  dividends  upon  their  in- 
vestment as  to  securing  a  large  vote  as  the  reward 
for  making  low  rates. 

I  rejoice  at  such  discussions  as  we  have  had  to- 
day, for  I  have  faith  in  the  ultimate  triumph  of 
common  sense  among  the  American  people. 


HENRY  H.  HALL  : 

Mr.  Beddall  has  prepared  a  very  instructive  di- 
gest of  the  laws  governing  the  business  of  insur- 
ance in  various  countries  of  the  world  and  this 
compilation  is  a  valuable  contribution  to  insurance 
literature. 


794 

It  appears  that  all  enlightened  countries  have 
found  it  desirable  to  have  certain  governmental 
control  and  supervision  of  the  corporations  en- 
gaged in  the  various  branches  of  underwriting. 
There  are  good  reasons  for  such  surveillance  over 
this  class  of  corporations  not  applicable  to  other 
classes  of  corporations,  inasmuch  as  in  all  branches 
of  underwriting  the  contingencies  for  which  in- 
demnity is  provided  are,  more  or  less,  speculative 
and  long  deferred,  and  this  being  the  case,  there 
arises  a  necessity  for  ample  provision  for  such  con- 
tingencies, however  remote,  which  must  be  pro- 
vided for  with  exactness  and  not  affected  by  over- 
sanguine  temperament  of  Managers. 

Experience  has  demonstrated  correct  formula  for 
the  reserves  requisite  for  the  various  classes  of 
hazards  undertaken  and  with  a  proper  form  of 
statement,  honestly  made  up,  it  is  an  easy  task  to 
determine  the  relative  solvency  of  the  company 
making  it. 

This  nppears  to  be  the  extent  of  governmental 
supervision  in  foreign  countries,  to  wit  : 

Firsts  a  detailed  statement  of  the  assets  of  a 
company. 

Second^  a  correct  statement  of  its  liabilities. 

The  penalties  for  fraudulent  statements  are,  and 
should  be,  severe.  Nothing  more  than  this  ap- 
peariS  to  be  asked  for,  and  the  experience  of  many 


795 

years  has  demonstrated  that   nothing  more  than 
this  is  necessary  for  the  protection  of  the  public. 

The  laws  of  all  foreign  countries  appear  to  hold 
the  stockholders  of  insurance  companies  to  a  strict 
accountability,  and  when  the  liability  of  stock- 
holders is  limited  the  extent  of  a  stockholder's 
liability  is  far  in  excess  of  the  amount  of  cash 
capital  actually  paid  in.  This  provision  is  in 
marked  contrast  with  the  statutes  of  certain  of  our 
States  that  permit  the  segregation  of  assets  for  pre- 
ferred creditors  and  offer  a  premium  for  such  pre- 
ference by  permitting  the  companies  to  pay  higher 
dividends  than  would  be  the  case  if  their  entire 

assets  were   available   for  the  payment  of   their 

losses. 

In  this  respect  we  notice  the  greatest  difference 
between  the  insurance  law^s  of  the  various  States  of 
the  Union  as  contrasted  with  those  of  foreign  coun- 
tries. The  enactment  giving  preference  to  certain 
creditors  was  a  successful  attempt  to  secure  special 
legislation  favorable  to  a  certain  class  of  companies. 
Such  attempts  would  not  be  successful  in  a  foreign 
country  and  should  be  discouraged  in  our  own. 
The  interests  of  all  companies  doing  business  in 
the  United  States  are  identical  and  the  more  hon- 
orable companies  do  not  favor  appeals  to  legisla- 
tures for  the  advancement  of  individual  schemes 
or^^the  protection  of  special  interests. 


796 

Publicity  of  accounts  ;  severe  penalties  for  frau- 
dulent statements  ;  immunity  from  paternalism  in 
the  management  of  the  business  ;  full  liability  on 
the  part  of  stockholders— these  combined  have 
raised  the  credit  of  foreign  fire  insurance  com- 
panies and  fully  protect  their  policy-holders  ;  and 
what  more  is  necessary  ? 

It  will  be  seen  by  Mr.  Beddall's  paper  that  in 
certain  countries  the  difficulties  in  the  path  of  new 
companies  in  competition  with  older  and  stronger 
companies  are  removed,  and  the  writer  is  of  the 
opinion  that  some  consideration  might  properly  be 
shown  to  new  companies  in  this  country  by  a  gradu- 
ated reserve,  less  stringent  the  first  two  or  three 
years  of  a  company's  operations,  gradually  ap- 
proaching the  pro  rata  reserve  now  required. 

No  public  interest  requires  any  further  detail  of 
a  company's  management  beyond  a  statement  of 
its  assets  and  liabilities,  the  salaries  of  its  officers ; 
its  receipts  and  losses  in  each  State  should  not  be 
asked  for  or  published  except  for  the  purpose  of 
securing  information  for  the  collection  of  taxes  the 
statutes  of  the  State  imposes.  To  spread  broadcast 
the  results  experience  has  secured  is  inequitable 
and  unnecessary  for  public  protection.  An  insurance 
trust  is  impossible.  No  business  venture  is  easier 
to  undertake  than  the  organization  of  a  fire  insu- 
rance company.     No  expensive  plant  has  to  be 


797 

acquired,  no  right  of  way  secured,  a  few  weeks 
advertising  of  intent,  a  small  expenditure  for  office 
furniture  and  stationery,  and  a  new  company  can 
be  formed  ;  and  the  organization  of  such  com- 
panies is  automatic  ;  a  few  years  of  comparative 
immunity  of  losses,  the  great  reduction  in  the  sup- 
ply of  insurance  capital  by  a  large  conflagration, 
and  new  companies  rise  up  with  almost  the  rapidity 
of  the  growth  of  Jonah's  gourd  and  yet  there  have 
been  insurance  superintendents  who  have  allowed 
themselves  to  believe  that  no  fire  insurance  mon- 
opoly is  possible. 

With  the  establishment  of  an  insurance  depart- 
ment in  New  York  and  of  a  similar  department  in 
Massachusetts,  the  purpose  of  both  departments 
was  declared  to  be  to  shield  both  the  public  and 
insurance  companies  from  fraud  and  injustice.  It 
was  expected  that  the  departments  thus  created 
would  not  only  protect  the  public  from  fraudulent 
companies,  but  would  be  the  advisers  of  the  legis- 
latures in  insurance  matters,  protecting  the  com- 
panies from  crude  and  ignorant  legislative  schemes. 
So  clearly  was  this  expressed  that  judged  by  the 
intent  of  the  purposes  of  State  supervision  as  orig- 
inally expressed  whenever  the  implied  object  of  a 
bill  is  to  make  it  impossible  for  a  legitimate  insur- 
ance company  to  make  a  fair  profit  and  no  protest 
is  made    by  the  insurance  commissioner,  to  this 


798 

extent  he  is  false  to  a  trae  conception  of  his  duty, 
though  less  obnoxious  than  when  he  avows  this- 
result  to  be  his  purpose  in  the  administration  of 
his  oifice. 

The  foreign  companies  have  entered  the  United 
States  fully  willing  to  abide  by  all  restrictions 
placed  upon  domestic  companies.  They  are,  or 
should  be,  willing  to  submit  to  the  same  test  as  to 
solvency — the  same  publicity  as  to  their  accounts, 
and  should  expect  to  suffer  the  same  burdens  of 
taxation  that  false  theories  of  political  economy 
place  upon  domestic  institutions. 

Appreciating  fully  the  value  of  the  paper  of  Mr. 
Beddall  in  the  information  given,  we  cannot  ap- 
prove the  invitation  extended  to  the  forty  odd 
insurance  departments  to  assume  in  any  degree  the 
management  of  the  companies  or  the  naming  of 
rates  to  be  charged  for  insurance. 

The  writer  can  get  no  encouragement  for  such  a 
request  as  the  one  made  from  the  compilation  of 
insurance  laws  of  foreign  countries  that  has  been 
presented. 

The  purpose  of  governmental  supervision  in  all 
other  countries,  without  exception,  is  to  minimize 
the  demands  upon  companies — small  demands  but 
rigid  penalties — is  the  lesson  taught. 

Before  asking  of  the  various  Insurance  Depart- 
ments to  take  upon  themselves  additional  respon- 


799 

sibility  for  the  management  of  companies,  it  is 
well  first  to  inquire  the  limits  of  the  discretionary 
power  now  given  them  by  existing  statutes  ;  that 
any  vagary  can  be  indulged  in  by  the  exercise 
of  the  discretionary  power  now  vested  in  them 
Avithout  some  degree  of  judicial  control,  we  cannot 
believe.  The  channel  of  this  discretionary  power 
will  ere  long  be  clearly  defined  by  judicial  action, 
and  to  this  the  honorably  managed  companies 
must  wait  if  they  expect  to  retain  a  proper  control 
of  their  corx)orations  and  to  protect  the  interests  of 
their  shareholders.  A  large  proportion  of  these 
shareholders  are  dependent  people  who  have  come 
into  possession  of  their  holdings  by  inheritance, 
and  their  interests  should  be  safeguarded  as  care- 
fully and  have  the  same  protection  at  the  hands  of 
the  law  as  holders  of  other  property. 

In  the  light  of  recent  illustrations  of  capricious 
exercise  of  so-called  discretionary  power,  the 
danger  is  not  imaginary,  and  the  comj^anies  may 
with  confidence  appeal  to  the  General  Convention 
to  which  this  is  addressed. 

May  we  not  expect  a  clear  statement  of  the  true 
purpose  of  insurance  supervision?  If  it  extends 
beyond  the  few  simple  requirements  the  larger 
experience  of  foreign  countries  has  found  to  be  re- 
quisite, what  then  are  its  proper  limitations,  and 
to  what  extent  is  it  desirable  to  go  to  serve  the 


800 

purposes  for  which  it  was  created  ?  Can  there  not 
be  erected  a  barrier  behind  which  a  company- 
pursued  by  a  corrupt  official  or  one  eager  for 
notoriety  can  stand  and  present  as  a  limitation  of 
discretionary  power  the  deliverance  of  a  Conven- 
tion of  the  Insurance  Superintendents  of  the 
United  States  ?  For  this  we  appeal,  for  con- 
fronting us  is  a  series  of  protracted  suits  at  law 
upon  issues  that  would  never  be  raised  by  the 
great  majority  of  Insurance  Superintendents  of 
the  United  States. 

An  interpretation  of  the  true  scope  of  an  Insur- 
ance Department  by  this  Convention  will  prevent 
arbitrary  action  of  the  character  already  ex- 
perienced and  be  a  guide  to  the  courts  in  the 
contests  certain  to  be  brought  before  them  if  this 
form  of  malicious  persecution  is  persisted  in. 
There  can  be  no  antagonism  between  honestly 
managed  companies  and  an  honest  insurance 
superintendent. 

The  reports  of  the  departments  of  the  larger 
States  frequently  bear  testimony  to  the  prompt- 
ness with  which  the  companies  respond  to  all 
proper  inquiries.  No  objection  has  been  raised  to 
any  form  of  statement  devised  to  reveal  the  finan- 
cial condition  of  a  company  with  exactness. 

What,  in  the  judgment  of  this  convention,  is  the 
purpose  of  State  supervision  ? 


801 

Insuran(3e  superintendents  will  in  the  adminis- 
tration of  their  offices  rise  or  fall  to  the  standard 
thns  created  and  by  it  will  be  determined  whether 
State  supervision  is  true  to  the  purpose  of  its  crea- 
tion or  whether  it  has  degenerated  under  the 
withering  touch  of  iDartisan  politics. 


ELMER  H.  DEARTH  : 

Having  been  assigned  to  discuss  Mr.  Beddall's 
address  on  the  subject  of  "The  Foreign  Fire  In- 
surance Company  and  its  Business  Methods,"  I 
presume  that  I  am  expected  to  take  the  negative 
side  of  the  subject.  Mr.  Beddall,  as  the  leading 
and  sole  exponent  of  the  affirmative  side,  has  so 
exhaustively  and  ably  handled  this  most  import- 
ant subject,  that  it  is  with  no  small  degree  of 
hesitancy  and  misgiving  that  I  enter  the  arena  of 
this  proposed  discussion.  In  short,  he  has  appar- 
ently so  thoroughly  covered  the  ground,  that  it 
hardly  seems  possible  for  one  to  take  up  any  line 
of  argument  or  thought  in  the  discussion  of  this 
question,  in  addition  to  what  has  been  so  ably 
said  by  Mr.  Kennedy  and  Mr.  Hall  who  have  pre- 
ceded in  this  discussion,  which  can  possibly  be  con- 
sidered of  any  special  interest  or  value  to  the  gen- 


802 

eral  insurance  public  or  fraternity.  What  I  may- 
have  to  say  will  not,  therefore,  be  necessarily 
termed  as  a  discussion  of  Mr.  BeddalFs  address, 
but  as  more  in  the  nature  of  a  reference  to  and 
criticism  of  certain  business  practices,  or  methods, 
if  you  please,  which  are  indulged  in  by  our 
foreign  fire  insurance  companies,  and  also  a  few  of 
what  may  be  adjudged  by  some  of  these  com- 
panies as  impertinent  suggestions  in  the  way  of 
possible  reforms,  the  purpose  of  which  shall  be  to 
secure  just,  honest  and  legal  protection  to  our 
liome  or  United  States  companies  against  w^hat  I 
shall  presume  to  term  as  unjust,  unfair,  and 
technically,  if  not  actually,  illegal  competition  of 
European  and  other  foreign  country  companies. 
What  I  may  say  must  not  necessarily  be  con- 
sidered as  officially  stated,  in  my  capacity  as  In- 
surance Commissioner  of  the  State  of  Minnesota, 
but  simply  as  in  the  execution  of  a  merely  per- 
sonal duty  imposed  upon  me  by  your  honorable 
Committee  on  Programme. 

Mr.  Beddall's  address,  which  covers  139  pages  of 
printed  manuscript,  represents  a  vast  amount  of 
careful,  patient  and  conscientious  research  of  the 
insurance  laws  and  statistical  reports  covering 
insurance  transactions  of  the  United  States  and 
the  leading  countries  of  Europe.  With  the  lone 
exception    of    Great  Britain,   he  shows  that  all 


803 

these  countries  have  passed  laws  for  the  govern- 
ment of  fire  insurance  companies,  consequently,  I 
may  fairly  presume  that  it  is  due  to  this  absence 
of  home  statutory  regulation,  that  the  British 
companies  (although  there  are  others)  are  so  prone 
to  follow  what  may  mildly  be  termed  irregular  or 
unjust  methods  in  the  conduct  of  their  under  writ- 
ings in  the  United  States,  this  being  none  other 
than  the  practice  of  entering  into  a  special  re- 
insurance contract  with  companies  of  foreign  coun- 
tries, which  have  never  even  attempted  to  legally 
enter  the  United  States  for  the  transaction  of  busi- 
ness, under  the  terms  of  which  contract  the  com- 
pany, or  companies,  writing  the  original  policy, 
is  immediately  or  automatically  relieved  from  a 
sufficient  percentage  of  the  risk,  to  reduce  the 
amount  of  liability  assumed  on  a  single  line,  to 
the  limit  prescribed  under  the  statute  of  the  State 
wherein  the  risk  may  be  located.  By  this  practice 
a  single  company  issues  a  policy  covering  an 
enormous  line,  which,  upon  its  face,  flagrantly 
violates  the  statute  regulating  the  limitation  of 
hazard  that  can  be  assumed  upon  any  one  risk.  It 
is  also  clearly  an  evasion  of  the  Minnesota  stat- 
utes, at  least,  covering  the  matter  of  taxation  upon 
the  premium  receipts,  and  further  tends  to  limit 
fair,  just  and  honest  competition.  By  this  method 
a  great  injustice  is  worke(J  upon  other  authorized 


804 

companies,  especially  home  or  United  States  com- 
panies, which  are  justly  entitled  to  receive  their 
proportionate  share  of  all  the  legitimate  business 
which,  under  such  practices,  goes  to  unauthorized 
foreign  corporations,  and  further  works  a  great 
hardship  upon  the  local  resident  agents  of  other 
companies  by  depriving  them  of  a  very  consider-, 
able  amount  of  revenue  on  the  business  thus 
placed  abroad,  which  legitimately  belongs  to 
them.  This  practice  should  be  prohibited  by 
statutory  enactments,  requiring  that  all  re- 
insurances of  business  in  the  respective  States 
shall  be  effected  solely  with  duly  authorized  com- 
panies in  such  States,  and  all  policies  covering 
such  re-insurances  shall  be  signed  by  their  author- 
ized resident  agents. 

I  do  not  wish  to  be  understood  as  saying  that 
none  but  foreign  country  companies  are  guilty  of 
effecting  such  re-insurance  contracts  with  unau- 
thorized companies  of  the  old  world,  for  it  is  well 
known  that  certain  United  States  companies  pur- 
sue the  same  methods,  but  it  may  be  presumed 
that  they  have  been  forced  to  this  practice  as  a 
matter  of  self-defense  ;  however,  the  same  criti- 
cism applies  in  all  such  cases  with  equal  force. 

Under  the  laws  of  Massachusetts,  companies  are 
prohibited  from  effecting  any  re-insurance  of  prop- 
erty in  that  State  in  unauthorized  companies,  and 


805 

in  Ms  annual  report  for  1898,  Insurance  Commis- 
sioner Frederick  L.  Catting  somewhat  sharply 
criticises  what  he  terms  as  persistent  attempts  of 
agents  of  certain  foreign  insurance  companies  to 
procure  a  modification  of  the  law  in  question.  I 
quote  therefrom  as  follows  : 

'^  But  in  later  time  an  altogether  new  project  has 
shown  itself,  which,  while  having  no  merit  in  it- 
self, and  in  tendency  subversive  of  every  effort  to 
keep  the  business  under  proper  observation  and 
restriction,  has  attempted  speciously  to  attach  it- 
self to  the  before-named  occasional  need  for  extra 
insurance  in  justification  of  its  existence.  Allu- 
sion is  here  made  to  the  persistent  attempts  of  a 
few  agents  of  foreign  companies  to  procure  such 
modification  of  the  law  as  will  permit  them  at  once 
and  without  ceremony  to  re-insure  any  or  all  of 
their  writings  in  any  companies  of  foreign  coun- 
tries that  best  suit  their  convenience,  thus  making 
themselves  virtually  and  actually  local  agents  of 
companies  wholly  unknown,  which  give  no  em- 
ployment to  our  capital  or  people,  contribute 
nothing  to  the  expenses  of  protecting  the  business, 
but  are  mere  absorbers  of  whatever  profit  may 
result  from  an  unjust,  unfair  and  unnecessary 
competition.  A  specious  and  unworthy  plea  is  the 
great  wealth,  strength  and  honor  of  the  foreign 
companies,  as  contrasted  with  our  own. 


806 

The  direct  tendency  and  inevitable  result  of  the 
successful  outcome  of  this  scheme  would  be  to  give 
a  few  branches  of  foreign  companies  the  entire 
insurance  business  of  the  State.  It  would  be  a 
measure  of  great  and  profitable  advantage  to  them, 
inasmuch  as  it  is  vastly  easier  and  cheaper  to  write 
a  policy  of  one  or  two  hundred  thousand  dollars 
and  toss  it  across  the  sea  by  mail  to  be  disposed  of, 
than  to  have  to  distribute  it  in  fractions  among 
the  authorized  companies ;  besides,  also,  the  com- 
mission could  easily  be  much  more  liberal. 

Under  an  evident  misunderstanding  of  facts,  the 
merchants  in  several  cases  have  been  led  to  lend 
their  influence  to  this  scheme,  not  one  of  whom,  it 
is  believed,  under  a  fair  presentation  would  have 
given  it  countenance.  Suppose,  for  instance,  the 
merchant  should  sit  down  and  let  the  boot  be  fitted 
on  the  other  foot.  Let  all  laws  for  the  protection 
and  convenience  of  his  trade  be  repealed,  and  the 
door  be  thrown  open  to  foreign  agents  soliciting 
and  seducing  away  his  customers,  clamorous  and 
zealous  for  the  better  commissions  their  prin- 
cipals' immunity  from  certain  expenses  enabled 
them  to  allow — does  any  one  doubt  that  the  mer- 
chants would  think  they  ought  to  be  protected 
from  such  competition  by  the  laws  ?  If  the  mer- 
chant, why  not  the  insurance  companies — especi- 
ally when  the  latter  are  willing  that  it  shall  be 


807 

made  easy  for  the  public  to  procure  in  companies 
not  authorized  the  insurance  that  capital  duly  au- 
thorized to  do  business  here  declines  to  assume. 

If  this  view  of  the  case  prevails,  and  the  prohibi- 
tion which  prevents  the  re-insurance  of  property  in 
Massachusetts  in  companies  not  authorized  still  re- 
mains in  force  unless  authorized  capital  refuses  to 
take  the  risk  seeking  protection,  it  will  be  a  happy 
solution  of  the  question." 

Commenting  upon  the  freedom  enjoyed  in  Great 
Britain,  where  there  are  no  insurance  laws  fixing  a 
standard  of  solvency,  or  regulating  the  amount  of 
capital  under  which  a  company  may  transact  busi- 
ness, and  that  consequently  there  is  nothing  to 
prevent  a  company,  legally  organized,  from  writ- 
ing all  the  policies  which  property  owners  will  pay 
for,  whether  its  capital  be  a  hundred  dollars  or  a 
million,  Mr.  Beddall  asserts  that  there  are  fewer 
irresponsible  companies  and  a  smaller  opportunity 
for  imposing  upon  the  ignorance  of  the  people  in 
that  country  than  in  the  United  States,  where  the 
most  elaborate  laws  exist  for  their  protection. 
This  assertion,  taken  as  an  abstract  statement, 
may  in  a  measure  be  true,  but  nevertheless  it  is 
safe  to  say  that  but  for  our  system  of  Department 
supervision,  there  would  have  been  thousands  of 
dollars  lost  to  the  citizens  of  the  United  States, 
where  there  has  been  one  on  account  of  *'  wild  cat'* 


808 

and  irresponsible  adventurers.  In  an  old  country- 
like  Great  Britain,  all  classes  of  business  are  con- 
ducted upon  the  most  conservative  lines  imagin- 
able, and  where  there  is  one  new  business  venture 
launched  upon  the  commercial  community,  there  are 
hundreds  in  the  United  States — a  fact  which  holds 
true  in  all  new  countries  with  practically  inexhaus- 
tive  natural  resources  which  are  being  developed 
with  such  astounding  rapidity  as  in  our  own. 

I  surely  do  not  believe  that  Mr.  Beddall  would 
be  willing  to  put  himself  on  record  as  in  favor  of 
doing  away  with  all  insurance  laws  in  this  coun- 
try, and  thereby  compel  the  public  to  depend  upon 
the  enforcement  of  the  criminal  code  to  protect 
themselves  against  the  operations  of  every  irre- 
sponsible and  '*wild  cat"  insurance  institution, 
which  would,  immediately  upon  the  beginning  of 
such  a  condition  of  affairs,  multiply  by  the  score, 
yes,  even  by  the  hundreds,  and  every  one  of  them 
would  find  plenty  of  unsuspecting,  credulous 
people  to  buy  their  policies,  and  that  without  lay- 
ing themselves  (the  companies)  subject  to  the 
criminal  laws  that  might  be  upon  the  statute 
books. 

There  certainly  can  be  no  question  but  that  the 
existence  of  fair,  wholesome  laws,  providing  for 
the  organization  of  insurance  companies  upon  a 
sound  and  solvent  basis,  and  for  a  fair  and  im- 


Of    THE 

UNIVERSITY 

OF 


809 

partial  supervision  of  the  same  by  honest,  experi- 
enced insurance  officials,  whose  duty  it  is  to  see 
that  such  laws  are  fairly  and  justly  enforced,  re- 
sults in  the  saving  of  vast  sums  of  money  to  the 
general  public  that  would  otherwise  be  lost,  or  to 
use  a  harsher  term,  of  which  the  people  would  be 
robbed,  in  the  absence  of  the  protection  thus 
afforded. 

We  frequently  hear  it  said  that  there  exists  in 
the  United  States  a  feeling  of  unfriendliness 
towards  foreign  fire  insurance  companies.  I  will 
not  presume  to  say  that  such  a  feeling,  or  senti- 
ment, at  least  in  some  quarters,  does  not  actually 
exist.  Doubtless  many  claim  that  such  a  senti- 
ment is  clearly  manifested  through  the  attempts 
that  have  been  made,  and  are  being  made  in  the 
legislatures  of  certain  States,  to  pass  a  law  pro- 
viding that  a  discriminating  tax  shall  be  paid  by 
foreign  country  companies. 

JN'ow  is  it  true  that  this  effort  to  secure  the  pas- 
sage of  laws,  requiring  that  this  class  of  companies 
shall  pay  a  higher  rate  of  taxation  than  that  de- 
manded of  home  or  United  States  companies,  is  an 
indication  that  the  best  of  feeling  may  not  exist  on 
the  part  of  our  citizens  towards  these  corpora- 
tions ?  Can  it  be  claimed  that  it  is  unpatriotic  on 
the  part  of  the  United  States,  or  unjust  to  the 
foreigners? 


I 


810 

It  is  said  that  in  England,  American  companies 
are  allowed  an  equal  chance,  under  identical  con- 
ditions, with  the  native  companies.  Commenting 
upon  this  assertion  a  prominent  and  well-known 
insurance  gentleman,  who  is  well  versed  in  the 
efforts  that  have  been  made,  on  the  part  of  certain 
United  States  companies,  to  gain  a  foothold,  in  a 
business  way,  in  Great  Britain,  has  the  following 
to  say : 

'*  It  may  be  true  that  the  American  companies 
have  an  equal  chance  in  England  with  the  native 
corporations,  at  the  same  time,  the  condition  is 
very  much  like  the  fable  dinner  which  the  fox  pre- 
pared for  the  crane,  consisting  of  very  thin  soup  in 
a  very  shallow  plate.  Only  two  or  three  American 
fire  companies  ever  tried  to  do  business  in  England 
and  they  made  a  failure  of  it.  They  did  not  suc- 
ceed in  getting,  all  told  among  them,  $100,000  of 
annual  premiums,  and  most  of  this  they  were 
obliged  to  accept  as  re-insurance  of  English  com- 
panies, the  English  people  refusing  to  patronize 
them  direct,  preferring  to  deal  with  English  com- 
panies, as  was  very  proper,  loyalty  to  home  insti- 
tutions being  characteristic  of  English  property 
owners,  as  it  ought  to  be  of  American  property 
owners." 

This  same  gentleman  further  adds  : 

''That  no  single  American  fire  insurance  com- 


811 

pany  ever  secured  $25,000  in  premiums  in  any  one 
year  out  of  all  England,  from  English  property 
owners  direct,  whereas  certain  single  English  com- 
panies secure  each  year  in  the  United  States  up- 
wards of  $5,000,000  in  premiums.  The  Royal  In- 
surance Company  (including  the  Queen,  of  America, 
which  is  owned  by  it)  secures  annually  over 
$6,000,000  in  premiums,  the  foreign  companies 
altogether  collecting  nearly  $50,000,000  on  Ameri- 
can business  each  year,  the  net  profits  of  which 
are  expended  abroad  in  support  of  stockholders 
in  London,  and  other  European  cities." 

Now  the  net  annual  profit  realized  by  these  com- 
panies upon  their  United  States  business,  as  shown 
by  their  sworn  statements  filed  with  the  various  in- 
surance departments,  is  nearly  double  the  net 
earnings  of  home  or  United  States  companies. 
This  is  principally  accounted  for  through  the  fact 
that  they  have  no  presidents,  secretaries,  or  other 
general  officers  in  this  country  drawing  large 
salaries,  which  is  chargeable  to  their  United  States 
business,  and  also  that  a  very  large  portion  of  their 
clerical  work  is  done  in  their  home  offices  where 
labor  is  cheap,  competent  bookkeepers  being 
secured  for  practically  one-half  what  it  costs  to 
secure  the  same  class  of  help  in  this  country. 
Their  United  States  business  is  conducted  simply 
as  agencies,   the  business  all  being  reported    to 


812 

their  respective  home  offices  in  Europe,  or  else- 
where. 

It  appears  from  the  sworn  statements  of  forty- 
four  foreign  country  companies  reporting  to  the 
Minnesota  Department,  for  the  year  ending  Dec. 
31st,  1897,  that  the  actual  cost  for  management  ex- 
penses, including  commissions  and  brokerage,  sal- 
aries, taxes,  fees,  and  all  other,  per  each  thousand 
dollars  of  insurance  written  during  the  year  (1897) 
was  $2.13,  while  the  same  expenses  on  the  part  of 
the  American  companies  was  $3.16,  this  showing  a 
saving,  in  favor  of  foreign  country  companies,  of 
$1.03  on  each  thousand  dollars  of  insurance  written, 
or  an  aggregate  saving  of  over  eight  millions  of  doll- 
ars ;  therefore,  it  is  plain  to  be  seen,  from  the  actual 
experience  of  the  foreign  companies,  as  above 
shown,  that  this  class  of  companies  could  pay  a  dis- 
criminating tax  of  1%,  as  against  2%  required  of 
home  or  United  States  companies,  and  still  leave  a 
net  ijrolit  in  their  favor,  on  account  of  all  expenses, 
outside  of  the  loss  element,  of  over  1%  on  each  dol- 
lar of  premiums  received. 

It  would  appear  that  there  could  be  no  valid 
reason,  or  argument  offered  against  the  enactment 
of  laws  requiring  said  companies  to  pay  this  ad- 
ditional tax  upon  their  business  transacted  in  the 
United  States.  I  do  not  presume  for  a  moment  to 
take  the  position  that  companies  of  foreign  coun- 


813 

tries,  which  are  possessed  of  such  a  vast  amount  of 
capital  and  resources  (as  are  a  few,  at  least,  of 
those  now  legally  operating  in  this  country)  should 
be  discriminated  against,  in  the  way  of  additional 
taxation,  or  in  any  other  respect,  to  an  extent  that 
would  render  their  business  operations  in  this 
country  unprofitable,  but  I  do  presume  to  say  that 
it  should  not  be  possible  for  these  companies  to 
realize  a  very  much  larger  percentage  of  profit  on 
their  United  States  business,  than  can  possibly  be 
earned  by  our  home  companies.  I  do  not  believe 
that  any  one  would  be  foolhardy  enough  to  assume 
that  any  of  the  comjjanies  organized  under  the 
laws  of  foreign  countries  are  transacting  business 
in  the  United  States  simply  from  philanthropic  or 
charitable  motives.  It  seems  to  me  that  there  is 
no  good  or  valid  reason  why  nearly  one-half  of  the 
total  fire  insurance  written  in  the  United  States, 
during  the  past  year,  for  instance,  should  have 
been  placed  with  foreign  conqDanies. 

The  records  show  that  the  106  American  fire  in- 
surance companies  reporting  to  the  Insurance  De- 
partment of  Minnesota,  as  of  the  year  ending  De- 
cember 31st,  1897,  wrote  insurance  in  this  country 
to  the  amount  of  $10,865,778,210,  while  during  the 
same  period  it  is  shown  that  44  foreign  country 
companies  reporting  to  the  Department  wrote,  in 
the  same  field,  $7,818,279,209.     Thus  it  is  seen  that 


814 

the  American  companies,  numbering  nearly  twice 
and  one-half  as  many  as  those  of  their  foreign  com- 
petitors, secured  only  about  one-third  more  busi- 
ness. Companies  which  can  come  to  this  country 
from  abroad  and  secure  such  a  vast  volume  of  busi- 
ness, as  above  indicated,  should  certainly  not  ob- 
ject to  any  discrimination  in  the  way  of  taxes,  or 
otherwise,  so  long  as  the  same  does  not  increase 
their  expense  element,  incident  to  the  conduct  of 
their  United  States  business,  to  an  amount  in  ex- 
cess of  that  experienced  by  our  home  companies. 

From  the  records  of  the  Minnesota  Insurance  De- 
partment I  find  that  the  annual  cost,  per  thousand 
dollars  of  insurance  written  during  the  year  1897, 
on  account  of  taxes  and  fees,  was,  for  foreign 
country  companies,  16  cents,  while  to  American 
companies  the  cost  was  22  cents.  This  certainly 
is  not  just.  From  these  figures  it  will  be  seen  that 
home  or  American  companies  are  actually  taxed 
higher  here  at  home  than  are  the  foreigners.  Such 
discrimination  in  favor  of  foreign  companies  exists 
in  the  States  of  California,  Delaware,  New  Hamp- 
shire, Maine,  Maryland,  and  possibly  one  or  two 
others.  The  annual  reports  of  the  California  In- 
surance Department  show  that  the  total  premium 
receipts  on  California  business  of  foreign  fire  insur. 
ance  companies  operating  in  that  State,  covering 
the  years  1878  to  1897  inclusive,  were  $46,480,442.88, 


815 

and  not  a  cent  of  tax  has  been  collected  from  said 
companies  thereupon,  while  practically  all  Ameri- 
can companies  have  been  required  to  pay  the  regu. 
lar  2%  tax  under  the  retaliatory  provisions  of  the 
statutes.  It  will  thus  be  seen  that  the  foreign  com- 
panies were  able  to  earn  in  this  State,  in  excess  of 
the  American  companies  on  a  like  amount  of  busi- 
ness, nearly  $1,000,000  during  the  period  in  ques- 
tion. 

In  the  year  1885  the  State  Legislature  of  Califor- 
nia passed  a  law  requiring  all  foreign  companies  to 
pay  only  1%  on  their  premiums  to  the  county  treas- 
urer of  each  county  in  which  they  transacted  busi- 
ness, but  even  this  law  was  contested  by  the  foreign 
companies,  and  strange  as  it  may  seem,  was  de- 
clared unconstitutional.  This  surely  is  an  indica- 
tion that  our  foreign  brethren  are  not  at  all  anxious 
to  contribute  towards  the  expenses  incident  to  the 
running  of  our  American  Government  or  institutions. 

In  the  State  of  New  Hampshire,  American  com- 
panies are  required  to  pay  a  tax  of  2%,  as  against 
1%  required  of  foreign  companies.  Commenting 
upon  this  matter,  Insurance  Commissioner  Linehan 
of  that  State,  in  his  last  annual  report,  has  the  fol- 
lowing to  say  : 

"  In  January,  1897,  the  insurance  commissioner 
drew  up  a  bill  to  amend  Chapter  169  of  the  publi 
statutes  relating  to  foreign  insurance  companies  and 


816 

their  agents.  The  occasion  for  it;  was  this  :  A  re- 
ciprocal law  had  been  enacted  by  the  Legislature  of 
1895.  Under  its  requirements  the  insurance  com- 
missioner was  obliged  to  impose  the  same  fees  and 
taxes  on  companies  of  other  States,  authorized  to 
do  business  in  New  Hampshire,  as  were  imposed 
on  New  Hampshire  companies  under  the  require- 
ments of  the  laws  of  such  States  in  which  they 
were  authorized  to  do  business.  The  effect  of  this 
was  the  imposition  of  a  tax  of  2  per  cent,  on  the 
premiums  received  by  every  American  company 
authorized  to  do  business  in  New  Hampshire,  save 
those  from  Connecticut  and  California.  This  gave 
a  decided  advantage  to  the  companies  from  foreign 
countries  who  were  obliged  to  pay  but  one  per  cent., 
and  to  remedy  this  inequality,  as  well  as  to  increase 
the  revenue  of  the  State,  the  bill  was  prepared.  It 
was  submitted  to  the  Chairman  of  the  House  Com- 
mittee on  Insurance  early  in  the  session  of  1897,  the 
occasion  for  it  fully  explained,  and  at  the  time  met 
with  his  approval.  For  reasons  best  known  to  him- 
self, but  quite  as  well  apparent  to  others,  he  ex- 
perienced a  change  of  heart  and  postponed  action 
in  the  Committee  until  March  11th.  Before  this 
date  the  Commissioner  had  appeared  before  the 
Committee  and  fully  explained  the  provisions  of 
the  act.  The  majority  of  the  Committee  voted  tliat 
the  bill  ought  to  pass,  but  it  was  not  reported  to 


817 

the  House  by  the  Chairman  until  just  before 
the  adjournment  on  March  26th,  when  the 
Secretary  of  the  Insurance  Committee  forced  him 
to  report  it.  The  printed  report  of  the  proceedings 
read,  the  Chairman  defended  his  action  as  Chair- 
man of  the  Committee  on  Insurance  and  attacked 
the  Insurance  Commissioner  as  desiring  despotic 
power  in  his  department.  The  truth  of  the  matter 
is,  the  defeat  or  passage  of  the  bill  made  no  change 
in  the  power  of  the  Commissioner.  It  was  too  late 
in  the  session,  however,  to  consider  it,  and  action 
was  indefinitely  postponed.  The  Insurance  Com- 
missioner feels  that,  in  justice  to  himself,  the  above 
facts  should  be  known." 

It  certainly  appears  somewhat  singular  that  the 
Chairman  of  the  House  Committee  on  Insurance,  of 
the  New  Hampshire  Legislature,  as  an  exponent  of 
simple  justice  and  equal  rights,  as  affecting  all 
business  interests  in  his  State,  should  not  have 
used  his  best  efforts  to  secure  the  passage  of  a  law 
that  would  have  required  of  foreign  companies 
simply  the  same,  or  equal  impositions  as  are  de- 
manded of  home  or  American  insurance  corpora- 
tions, for  surely,  it  would  not  seem  possible  that 
the  foreign  companies  themselves  would  use  any 
efforts  to  defeat  a  measure  that  was  simply  placing 
them  upon  a  like  or  an  equal  basis  with  their 
American  competitors. 


818 

The  records  of  the  Minnesota  Department  fur- 
ther show  that  the  foreign  insurance  companies 
returned  to  their  home  offices — not  only  during  the 
past  year  of  1897,  but  for  several  of  the  preceding 
years — practically  double  the  amount  that  was 
paid  in  dividends  and  interest  by  the  American 
companies.  In  computing  this  element  of  profit, 
consideration  was  taken  of  the  money — which  the 
sworn  statements  of  the  foreign  companies  show 
was  sent  to  their  home  or  parent  offices,  in  excess 
of  the  amount  that  was  sent  to  this  country  during 
the  same  period.  Therefore,  the  records  show 
that  the  net  profits  of  the  foreign  companies,  on 
the  volume  of  business  transacted  in  the  United 
States,  were  practically  one  hundred  per  cent,  in 
•excess  of  the  net  earnings  realized  by  their  Ameri- 
•can  competitors. 

Now  it  is  really  hard  to  conceive  of  any 
valid  reason  why  foreign  companies  should 
resist  the  passage  of  a  law,  the  simple  pro- 
visions of  which  are  the  placing  of  said 
companies  upon  an  equal  basis,  as  far  as  the 
•expense  element  is  concerned  on  their  business 
transactions  in  the  United  States,  or  in  any  other 
material  respect,  with  that  of  the  American  com- 
panies, and  I  do  not  for  a  moment  believe  that  the 
most  ardent  champion  of  protection  for  home  in- 
dustries, particularly  as  applied  to  insurance  cor- 


819 

porations,  will  for  a  moment  presume  to  ask  for 
anything  further  than  that  this  be  secured.  No 
one  has  yet  asked  that  there  shall  be  any  laws  en- 
acted, whereby  any  greater  hardship  shall  be 
placed  upon  foreign  companies  than  upon  our  own. 
All  that  is  asked  or  desired  is  simply  equality,  to 
the  extent  that  our  foreign  brethren  shall  be  pro- 
hibited from  effecting  contracts  of  re-insurances  of 
United  States  risks  with  unauthorized  foreign 
companies,  and  shall  simply  be  required  to  pay,  in 
the  way  of  taxes  or  fees  upon  their  business  in 
this  country,  such  an  amount,  for  the  support  of 
the  United  States  Government,  or  its  home  institu- 
tions, as  shall  place  them  upon  an  equal  footing 
with  their  American  competitors,  as  regards  the 
expense  element  incident  to  their  business  trans- 
actions in  this  country.  This  certainly  should  not 
be  resisted,  or  even  objected  to  by  the  foreign 
companies,  but  strange  to  say,  such  is  not  the  sit- 
uation. In  all  instances  where  the  legislature  of 
any  State  has  presumed  to  secure  the  enactment  of 
any  statute,  the  purpose  of  which  was  that  of  sim- 
ply tending  to  equalize  the  expense  element  of  the 
foreign  and  American  fire  insurance  companies, 
the  same  has  met  with  a  most  vigorous  and  persis- 
tent opposition  at  the  hands  of  the  foreign  corpor- 
.ations.  In  practically  all  cases  they  have  been 
successful  in  defeating  the  passage  of  such  proposed 


820 

laws,  a  notable  exception,  however,  being  that  of 
the  State  of  Iowa,  the  legislature  of  that  State 
having  succeeded  in  passing  a  law  which  imposes 
an  additional  tax  upon  foreign  companies,  and 
.which  will,  in  a  measure  at  least,  equalize  the  ex- 
pense element  of  their  business  transactions  in 
that  State,  as  compared  with  their  American  com- 
petitors. An  unsuccessful  effort  was  made  during 
,the  present  year  by  the  legislatures  of  the  States 
of  New  York  and  Ohio  to  enact  a  similar  law. 

One  of  the  principal  arguments  used  in  their  ef- 
forts to  defeat  such  legislation  has  been  that  the 
same  violates  the  fourteenth  amendment  of  the 
Constitution  of  the  United  States,  in  that  it  would 
illegally  and  unjustly  discriminate  between  insur- 
ance corporations  of  other  States  of  the  United 
States,  as  well  as  of  States,  nations,  governments, 
or  countries  other  than  of  the  United  States.  Such 
argument,  however,  has  been  practically  exploded 
by  some  of  the  most  eminent  authorities  in  this 
country  on  constitutional  law,  and  in  support  of 
.such  opinion  have  cited  numerous  decisions, 
handed  down  by  some  of  the  leading  and  highest 
courts  of  the  country. 

It  has  been  stated  by  some  that  the  most  proper 
way  to  adjust  this  difference,  involving  the  expense 
element,  between  foreign  fire  and  American  fire  in- 
surance companies,  would  be  to  relieve  the  Ameri- 


•     821 

can  companies  entirely  of  such,  taxation,  and 
thereby  reduce  the  percentage  of  the  additional 
tax  imposition  that  is  being  proposed  for  the  for- 
eign companies.  It  is  very  improbable  that  such  a 
radical  measure,  as  this  would  involve,  could  ever 
be  passed  by  the  legislature  of  any  State,  for  there 
are  none  but  what  would  be  very  loath  to  relin- 
quish any  such  profitable  source  of  revenue  for 
their  respective  exchequers,  as  that  realized  from 
the  taxes  upon  the  business  of  the  fire  insurance 
companies.  While  it  is  an  acknowledged  fact  that 
the  premiums  are,  in  practically  all  cases,  suffi- 
ciently loaded  to  cover  the  additional  cost  to  the 
companies,  on  account  of  all  such  taxes  imposed 
under  the  laws  of  the  various  States,  thereby  in- 
creasing the  cost  of  insurance  to  the  policy  holders 
to  just  that  extent,  it  will,  beyond  question,  con- 
tinue to  be  a  popular  method  of  securing  funds  to 
apply  towards  the  support  of  the  respective  State 
governments.  Believing,  therefore,  that  any  prop- 
osition to  repeal  or  modify  the  laws,  covering  this 
matter  of  taxes,  will  be  impracticable,  it  would 
seem  that  no  argument  should  be  necessary  to 
secure  the  passage  of  a  law  imposing  an  additional 
rate  of  taxation  upon  foreign  companies,  beyond 
that  which  is  imposed  upon  American  corporations, 
so  long  as  such  increase  merely  places  them  upon  a 
like  or  equal  basis,  as  regards  the  expense  element 


822 

incident  to  the  transaction  of  their  business  in  this 
country.  This  certainly  appears  to  me  to  be  but  a 
matter  of  simple  justice,  and  to  which  our  home 
companies  are  absolutely  entitled. 

I  might  also  take  up  the  matter  of  re-insurance, 
or  unearned  premium  liability,  on  account  of  which 
the  foreign  fire  companies  have  a  great  advantage 
over  their  American  competitors,  as  applied  to  their 
home  office  statements.  Take  for  instance  the 
English  companies.  In  the  absence  of  any  insur- 
ance laws  in  their  own  country,  they  are  not  re- 
quired to  show  any  absolute  percentage  of  liability 
on  account  of  unearned  premiums  on  their  out- 
standing business,  this  being  subject  entirely  to  the 
discretion  of  the  officers.  Doubtless,  with  very  few 
exceptions,  if  the  foreign  fire  insurance  companies 
were  compelled,  under  the  laws  of  the  various  States 
of  this  country,  to  file  a  sworn  statement  covering 
their  business  transactions  throughout  the  entire 
world,  said  statement  to  be  made  up  in  accordance 
with  the  provisions  of  the  statutes  of  the  respective 
States,  governing  the  matter  of  re-insurance  liabil- 
ity, the  same  would  show  them  to  be  in  a  state  of 
insolvency.  It  is  safe  to  say  that  jvery  few  com- 
panies would  care  to  have  this  test,  as  to  their 
financial  condition,  applied.  I  will  not,  however, 
presume  to  discuss  this  question,  as  I  am  person- 
ally inclined  to  the  belief,  that  inasmuch  as  all 


823 

foreign  companies  are  required  to  place  themselves 
npon  the  same  financial  footing  as  the  American 
companies  (before  they  can  legally  transact  busi- 
ness in  the  United  States)  by  the  deposit  of  a  sum, 
in  acceptable  United  States  securities,   equal  in 
amount  to  that  required  of  American  companies, 
in  the  way  of  paid-up  cash  capital,  which  deposit 
must  at  all  times  be  maintained  intact  for  the  sole 
protection  of  their    United   States   business ;  and 
further,  that  the  same  test  is  required,  as  regards 
the  standard  of  solvency   of  their  United   States 
branches,  or  agencies,  thus  established,  it  should 
be  a  sufficient  guarantee  as  to  the  absolute  pro- 
tection of  their  American  policj^-holders.     There 
is  possibly  one  vital   objection,  however,  to  this 
idea  of  relying  solely  upon  the  deposit  thus  held 
in  this  country  for  the  protection  of  their  United 
States  business,  this  being  none  other  than  the  uni- 
versal practice  of  annually  sending  to  the  home  or 
parent  offices,  practically  all  their  surplus  earnings 
or  funds.     If  the   same  were  required  to  be  re- 
tained in  financial  affairs,  would  in  no  way  interest 
their  American  policy-holders.     As  such  a  require- 
ment could  not  be  compelled  by  law,  as  there  could 
be    no    valid  legislation  that    could  interfere  or 
stipulate  as  to  what  shall  be  done  with  the  sur- 
plus earnings  of  a  foreign  company,  it  might  be 
proper  that  the  laws  of  the  various  States  should 


824 


require  a  full  and  complete  statement  of  the  whole 
business  of  the  foreign  company,  and  that  the  re- 
port of  the  American  or  United  States  business 
should  simply  bear  the  same  relation  to  the  state- 
ment of  the  corporation,  that  the  Minnesota  busi- 
ness, for  instance,  now  bears  to  the  statement  of 
the  American  or  United  States  corporation,  and 
that  the  same  requirements,  as  to  reserve  liability, 
re-insurance,  investment  of  assets,  etc.,  shall  apply 
to  the  whole  corporation,  and  not  only  to  a  frac- 
tion of  its  total  transactions,  as  covered  by  the 
United  States  branch  or  agency. 

Many  of  the  companies  are  apt,  and  in  many 
cases  do,  in  the  solicitation  of  business,  lay  a  good 
deal  of  stress  upon  the  fact  that  they  have  a  very 
large  capital  and  an  immense  amount  of  assets  in 
the  old  country,  and  hold  this  up  as  an  induce- 
ment for  the  citizens  of  the  United  States  to  pa- 
tronize them  instead  of  the  Americans.  Large 
capital  stock,  as  well  as  large  assets,  are  not  neces- 
sarily an  evidence  of  financial  strength.  It  is  the 
amount  of  net  surplus,  above  all  actual  liabilities, 
which  is  the  real  financial  test  of  any  corporation  ; 
therefore,  if  the  same  test,  as  regards  the  standard 
of  solvency,  was  applied  in  the  home  office  state- 
ments of  these  foreign  companies,  as  that  which  is 
applied  to  the  Americans,  it  is  safe  to  say  that  a 
very  large  majority  of  the  companies  would  be 


825 

very  slow  to  refer  in  any  way  to  the  financial  show- 
ing of  their  home  offices.  There  certainly  is  no 
question  but  that,  if  this  country  were  thrown 
upon  its  own  resources  to  furnish  its  entire  fire  in- 
surance protection,  there  would  be  found  ample 
capital  ready  for  investment  to  meet  the  emergency. 
At  the  same  time,  no  one  should  show  any  disposi- 
tion to  discriminate  unjustly  against  any  of  the 
financially  sound,  law-abiding,  foreign  fire  insur- 
ance corporations.  They  are  here  and  very  much 
in  evidence,  and  there  is  absolutely  no  question 
but  what  they  will  continue  to  stay  here,  and 
should  certainly  be  permitted  to,  but  they  should 
not  object  for  a  moment  to  the  imposition  of  any 
taxes  or  fees,  or  other  obligations,  so  long  as  the 
same  does  not  result  in  making  the  expense  ele- 
ment, incident  to  their  business  transactions  in 
this  country,  exceed  in  amount  that  which  is  ex- 
perienced by  our  home  or  American  corporations, 
or  otherwise  place  upon  them  any  unfair  or  unjust 
restrictions  as  regards  their  business  methods. 


THE    OBJECT    AND    PURPOSES    OF 

UNIONS  AND  ASSOCIATIONS  OF 

FIRE  UNDERWRITERS. 


R.  J.  SMITH  : 

THIS  is  the  subject  assigned  to  me,  I  find,  and 
presumably  for  the  reason  that,  knowing  my 
capacity.,  an  easy  question  was  propounded,  just  as 
the  teacher  at  the  school  examination  asks  the 
dull  boy  to  solve  only  such  problems  as  are  appar- 
ently easy  of  solution. 

Unions,  associations,  compacts,  boards  and 
clubs  in  fire  insurance  inatters  are  synonymous 
terms,  as  a  rule,  and  mean,  or  should  mean,  asso- 
ciated effort  to  afford  uniformity  in  practice  and 
by  virtue  of  the  strength  which  comes  to  numbers 
and  is  denied  to  single  individuals,  to  enforce  by 
mutual  agreement  that  which  the  majority  may  re- 
gard as  wholesome  and  safe. 

Naturally,    such    rules,    &c.,    which    are    thus 


827 

adopted  are  more  conservative  than  the  practice  of 
a  single  individual  would  be,  with  the  fear  con- 
stantly present  of  competitors  whom  he  may  re- 
gard as  less  conscientious  and  more  aggressive  than 
himself.  For  the  same  reason,  the  verdict  of  a  jury 
of  twelve  men,  when  free  from  prejudice,  is  con- 
sidered as  coming  nearer  to  simple  and  exact  jus- 
tice, than  that  of  any  single  individual,  no  matter 
how  learned  he  may  be  in  the  law.  Both  are  apt 
to  be  influenced  by  popular  prejudice  and  clamor, 
but  when  this  is  distributed  throughout  the  minds 
of  a  number  of  people,  multiplied  as  in  the  case  of 
a  jury  by  twelve,  it  is  diluted  and  more  likely  to 
be  harmless.  So  in  all  unions  or  associations,  the 
action  of  the  body  as  a  whole  cannot  be  more  radi- 
cal than  the  views  of  a  majority  and  very  often 
such  action  lor  prudential  reasons  does  not  go  be- 
yond the  opinions  of  a  timid  minority,  as  all  honest 
people  have  an  innate  desire  to  err,  if  at  all,  on  the 
side  of  moderation  and  consideration  of  the  rights 
and  opinions  of  others. 

The  popular  idea  that  Unions  or  Associations 
among  lire  underwriters  are  established  solely  to 
maintain  prices, — just  as  the  Beer  or  Biscuit  trusts 
are  supposed  to  do, — is,  of  course,  fallacious  and 
preposterous,  as  there  are  a  thousand  and  one  other 
matters  almost  equal  in  importance  which  if  uni- 
formity is  not  observed  and  proper  rules  to  govern 


828     • 

the  same  are  not  promulgated  and  maintained,  the 
whole  system  of  indemnity  fails  and  grows  rapidly 
into  disfavor  and  disuse.  The  rapid  pace  which 
modern  invention  and  discovery  have  assumed  as 
regards  power,  heat  and  light  makes  it  necessary 
that  all  these  subjects  should  be  thoroughly  inves- 
tigated as  to  their  fire  hazards.  The  changes  con- 
stantly taking  place  in  architecture  and  building 
material,  storage  and  use  of  articles  of  modern  in- 
vention, which  are  undoubtedly  subject  to  spon- 
taneous combustion  and  thus  endanger  property  of 
great  value  because  of  insidious  fires  ;  complicated 
machines  for  making  new  material  the  nature  of 
which  is  understood  by  few  ;  the  great  strides  made 
in  the  use  of  electricity  during  the  last  decade,  as 
well  as  of  oils  and  their  products,  to  say  nothing 
of  the  omnipresent,  and  always  to  be  feared,  moral 
hazard  and  the  changes  in  the  laws  of  the  various 
States  relative  to  forms  of  policies,  &c., — all  com- 
bine to  make  concerted  action  on  the  part  of  fire 
underwriters  who  have  to  do  with  all  these  matters 
and  who  are  held  to  full  account  and  responsibility 
by  the  capital  which  employs  them,  absolutely 
necessary,  even  if  the  question  of  rates  of  premium 
were  entirely  eliminated  from  their  consideration. 
This  is  an  era  of  evolution  and  education  and  we 
can  not  ignore  the  fact  that  to  meet  the  one  and 
solve  its  intricate  and  important  problems,  we  must 


829 

have,  to  the  largest  possible  degree,  the  other,  with 
all  that  knowledge  implies.  The  fire  underwriter 
is  not  only  responsible  to  his  employers  for  the 
safety  of  the  capital  invested,  but  he  bears  even  a 
greater  measure  of  responsibility  for  the  financial 
indemnity,  well  being  and  lives  of  his  neighbors 
and  patrons.  No  underwriter  who  is  at  all  quali- 
fied to  be  such,  can  shake  off  any  part  of  this  re- 
sponsibility, even  if  he  desired,  and  it  is,  therefore, 
natural  and  proper  that,  knowing  that  there  is  wis- 
dom to  be  found  in  the  counsels  of  the  m  any,  Jie  should 
proceed  not  only  to  take  counsel  of  his  fellows,  but 
also  to  investigate  and  learn  all  he  can  from  that 
and  all  other  available  sources.  The  banker's  re- 
sponsibilities end  when  he  collects  in  all  his  loans 
and  pays  his  depositors  and  shareholders  their  due, 
but  the  underwriter's  liabilities  are  continuous  and 
apparently  never  ending,  and  he  cannot,  therefore, 
be  too  cautious  nor  become  over  educated  in  his 
business  or  profession,  as  it  is  often  called. 

But  it  would  seem  to  be  unnecessary  and  a  work  of 
supererogation  to  enlarge  upon  the  value  of  united 
effort  under  uniform  and  conservative  rules  of 
practice,  to  an  assembly  such  as  this,  as  no  class  of 
business  or  professional  men  is  or  ought  to  be  better 
informed  on  the  subject  tlian  you,  gentlemen,  upon 
whom  the  laws  of  your  respective  States  impose  the 
duty  of  inquiring  into  and  becoming  familiar  with 


830 

all  the  intricacies,  ins  and  outs,  and  results  of  fire 
underwriting  in  America. 

No  one  knows  better  than  you,  if  you  have  kept 
pace  with  the  times,  that  a  very  large  majority  of 
the  concerns  of  all  kinds  designed  to  do  the  fire 
business,  that  have  been  organized  either  lawfully 
or  unlawfully  during  the  past  score  of  years  have 
proven  worse  than  failures,  and  hence  it  is  not  only 
becoming  but  necessary  that  the  intelligent  and 
conscientious  underwriters  of  the  present  day 
should  feel  great  concern  for  the  perpetuity  of 
those  that  have  weathered  all  the  storms  and  es- 
caped the  appalling  mortality  that  has  overtaken 
so  many.  You  are  also  equally  as  well  aware  of 
the  very  narrow  margin  of  actual  profits  that  has 
accrued  to  the  business  of  fire  insurance  during  the 
last  decade,  even  to  those  companies  that  are  care- 
fully and  ably  managed,  and  if  any  of  you  have 
indulged  in  careless  statements  about  enormous 
profits  that  have  been  carried  off  out  of  your  re- 
spective States  to  enrich  foreign  millionaires,  no 
one  better  than  yourselves  knows  that  such  state- 
ments are  solely  for  home  consumption  and  are  not 
borne  out  by  the  facts  which  reliable  statistics  fur- 
nish. 

I  have  touched  but  lightly  upon  some  of  the  ad- 
vantages to  be  expected  and  gained  by  associated 
effort  among  fire  insurance  men,  and   that  it  is 


831 

equally  advantageous  to  the  property  owner  and 
policy-holder  who  has  even  as  great  an  interest  in 
the  solvency  and  safety  of  the  companies  as  well  as 
the  intelligence  of  the  agent  he  employs,  goes  with- 
out saying.  Many  an  agent  has  saved  his  patrons 
thousands  of  dollars  by  prompt  and  discreet  action 
at  the  right  time  and  the  opportunities  for  doing 
this  over  and  over  again  grow  in  frequency  as  time 
goes  on,  and  yet  the  information  on  which  he  acts 
comes  mainly  from  his  association  with  others  in 
the  same  line  of  business. 

There  are  so  many  fallacies  in  the  minds  of 
many  people  about  the  purposes  of  fire  under- 
writers' unions  that  to  attempt  to  even  refer  to 
them  all  in  this  paper,  which  must  be  short,  would 
be  useless,  and  the  fact  that  such  documents  rarely, 
if  ever,  reach  the  eye  or  the  understanding  of  those 
who  appear  to  exist  mainly  on  fallacies  and  foibles 
renders  it  unnecessary.  Much  has  been  done  dur- 
ing the  last  twenty  years  by  the  individual  as  well 
as  by  the  associated  efforts  of  fire  underwriters 
towards  educating  the  public  in  one  way  or  another. 
The  various  fire  hazards  and  the  danger  of  keeping 
on  hand  or  using  certain  highly  inflammable  and 
explosive  compounds,  are  much  better  understood 
by  people  generally  than  they  were  a  few  years 
ago,  and  in  this  school,  object  lessons,  that  carried 
death  as  well  as  great  loss  of  property,  by  fire, 


832 

with  them,  have  taken  an  important  part,  as  we  all 
know. 

Improved  building  material  and  semi-fire-proof 
construction,  especially  in  our  large  cities,  have 
made  great  progress,  and  underwriters,  while  dis- 
counting the  clamor  and  claims  made  that  such 
cannot  burn,  are  gratified  to  see  that  the  chances 
for  stopping  great  conflagrations  have  been  im- 
proved, and  all  this  has  been  brought  about  by  the 
united  efforts  of  underwriters  who  disinterestedly 
sacrificed  much  of  their  income  in  the  hope  that 
the  general  public  might  at  least  stand  a  chance  of 
being  benefited  by  better  protection  to  both  life 
and  property. 

The  most  foolish  and  yet  the  most  popular  error 
still  in  the  minds  of  some  people  is  that  under- 
writers' unions  or  associations  are  for  the  purpose 
of  advancing  rates  of  premium  paid  for  fire  insur- 
ance.    The  record  of  rapid  and  material  reductions 
made  either  voluntarily  or  by  excessive  competi- 
tion during  the  past  ^ve  years  should  afford  to  the 
observing  person  ample  and  conclusive  evidence 
that  such  organizations  do  not  and  can  not  in  the. 
very  nature  of  things  accomplish  anything  in  this 
way.    TooJ  often  the  organization  of  fire  under- 
writers is  made  the  instrument  for  greater  reduc- 
tions in  rates  than  the  loss  ratios  and  accompany- 
ing expenses  will  warrant.    Many  instances  of  this 


833 

kind  could  be  given  without  ^oing  outside  of  this 
State  and  the  average  underwriter  who  occupies  a 
responsible  position  often  wonders  if,  after  all, 
there  would  not  be  greater  profit  and  less  worry 
if  all  organizations  were  abandoned  at  least  for  a 
time.  This  experiment  is  now  being  tried  in  New 
York  City  and  Brooklyn,  where,  I  understand, 
some  of  the  ambitious  companies  are  taking  on 
enormous  lines  for  a  term  of  several  years  at  merely 
nominal  rates  of  premium — remuneration  which  is 
so  infinitesimal  that  even  a  microscope  would  fail  to- 
disclose  any  residue  after  commissions  and  ex- 
penses are  deducted.  This,  however,  is  a  matter 
which  comes  within  the  province  of  you,  gentlemen, 
who  examine  and  approve  of  financial  exhibits 
made  to  you  by  the  companies,  I  am  persuaded 
that  you  will  not  overlook  entirely  the  necessity  of 
an  ample  reserve  in  all  such  cases. 

With  the  number  of  competing  companies  largely 
increased  over  what  was  ever  before  known  in  this 
country  and  the  number  of  agents,  brokers,  solici- 
tors, &c.,  multiplied  many  times  over  (and  you, 
gentlemen,  must  share  some  portion  of  the  responsi- 
bility for  both  these  latter  conditions)  with  a  large 
number  of  strong  and  influential  companies  out- 
side of  the  unions  and  acting  independently  of 
them,  to  say  nothing  of  a  considerable  number  of 
institutions,  good,  bad  and  indifferent,  whic^   by 


834 

the  grace  of  God  and  the  permission  of  State  offi- 
cials j)ractice  overhead  and  undergound  methods  of 
underwriting,  such  a  thing  as  "maintaining  high 
rates  ' '  or  even  moderate  rates,  is  impossible.  No 
other  business  or  profession  is  subjected  to  so  many 
expensive  annoyances  or  so  much  competition  of 
all  kinds  as  ours.  The  medical  profession  may  be 
annoyed  by  the  patent  medicine  fakir,  and  the  legal 
profession  by  the  shyster,  but  these  are  mere  flea 
bites  when  compared  with  the  troubles  and  trials 
of  the  conscientious  and  law-abiding  underwriter. 

Some  surprise  is  occasionally  expressed  by  un- 
thinking people  that  underwriters  should  seek  to 
associate  together  and  learn  wisdom  from  each 
other's  experiences,  &c.  They  forget  that  nature 
has  provided  that  the  beasts  of  the  field,  the  birds 
of  the  air  and  the  fish  in  the  sea  have  from  the  be- 
ginning of  time  sought  the  society  and  protection 
that  is  found  only  in  association. 

The  merchant,  manufacturer  and  the  laborer 
have  all  from  time  immemorial  associated  them- 
selves together  for  mutual  protection,  and  you, 
gentlemen,  years  ago,  came  together  and  formed  an 
association  believing  it  for  the  good  of  all  to  take 
counsel  one  with  another.  Divine  inspiration  has 
decreed  that  when  two  or  three  (or  more)  are 
gathered  together,  &c.,  it  will  be  beneficial  to  all 
in  the  end.     So  that  the  "  bogeyman  ''    so  often 


835 

seen  in  the  simple,  crude  and  loosely-bound  bodies 
of  iire  underwriters  should  be  known  by  this  time 
and  when  the  searchlight  of  modern  days  is  turned 
upon  them,  they  may  be  estimated  at  their  true 
worth  and  not  made  the  scapegoat  of  interested 
parties  or  allowed  to  furnish  ammunition  for  the 
use  of  the  average  political  bummer  who  trades  on 
misapprehension  and  misrepresentation. 

May  we  not  indulge  in  the  hope  and  venture  to 
predict  that  we  shall  have  in  due  time  legitimate 
and  conservative  fire  underwriters'  associations — 
local  or  general— designed  to  conserve  and  protect 
the  best  interests  of  both  the  insurer  and  the  in- 
sured, and  make  the  indemnity  the  latter  buys  of 
the  former  safe  and  unquestioned,  and  the  cost  as 
low  as  the  nature  of  the  business  will  permit,  and 
may  they  be  regarded  as  among  the  necessary  and 
legitimate  institutions  of  the  country,  to  the  end 
that  fire  insurance  may  be  placed  where  it  belongs 
— alongside  of  banking,  the  adjunct  and  auxiliary 
of  all  kinds  of  legitimate  trade  and  commerce, 
whether  on  land  or  the  high  seas. 


J.  H.  LENEHAN  ; 

The  object  and  purposes  of  Unions,  Advisory 
Boards  and    Associations    of    Fire    Underwriters 


836 

have  been  so  fully  and  so  clearly  set  forth  by 
the  gentleman  to  whom  that  topic  was  as- 
sip:ned,  and  whose  knowledge  and  experience 
are  so  far  reaching,  that  further  discussion  of  it 
seems  superfluous.  I  am  disposed,  however,  to 
briefly  express  the  sentiments  I  hold  on  the  subject, 
as  it  is  one  of  immeasurable  interest,  yes,  of  almost 
vital  importance  to  the  well  being  of  the  Fire  In- 
surance Business  in,  that  it  is  the  natural  method 
for  fostering  and  propagating  it.  Herbert  Spencer 
said  that  ''  Socially  as  well  as  individually  organi- 
zation is  indispensable  to  growth."  It  is  the  ante- 
cedent of  the  family  and  the  state  ;  the  fundamen- 
tal principle  of  human  progress  in  science  and  the 
arts,  in  commerce  and  in  trade,  and  can  no  more  be 
dispensed  with  than  the  desire  for  association  with 
its  kind  can  be  eliminated  from  the  human  heart. 
Br.  Capen,  President  of  Tufts  College,  Massa- 
chusetts, in  an  address  on  the  subject  of  "College 
Fraternities  "  most  clearly  expresses  the  necessity 
for  co-operation  as  follows  :  ' '  Wonderful  achieve- 
ments have  been  made  by  men  working  single 
handed  and  alone.  But  these  are  rare.  For  the 
most  part  the  great  movements  are  concerted 
movements.  The  forward  steps  in  the  path  of 
progress  are  the  steps  of  the  collective  humanity. 
If  a  great  principle  is  to  be  carried  to  fruition,  it  is 
needful  to  do  more  than  convert  one  man  to  it, 


837 

even  though  that  one  be  great.  The  principle 
must  be  put  into  the  living  mass,  and  so  fixed  and 
fired  that  all  shall  move  together  under  its  im- 
pulse." And  that  this  is  not  only  true  of  great 
movements,  religious  or  moral,  but  j)olitical  and 
commercial  as  well,  cannot  be  questioned. 

The  great  expounder  of  the  Constitution  in  ad- 
vocating the  desirability  of  concerted  action  force- 
fully puts  it  in  these  words:  "There  are  many 
objects  of  great  value  to  man  which  cannot  be  at^ 
tained  by  unconnected  individuals,  but  must  be  at 
tained,  if  attained  at  all,  by  association."  Th^ 
past  reveals  and  history  records  that  in  the  several 
walks  of  social,  professional  or  commercial  life 
organization  is  the  sine  qua  non  to  growth,  pro- 
gress and  assured  success. 

Confining  our  attention  in  the  application  of 
these  conclusions  to  the  question  of  the  objects 
and  purposes  of  organizations  and  associations  of 
fire  underwriters,  we  are  led  to  briefly  examine  the 
effect  of  such  organizations  or  associations  that 
the  cause  for  them  may  be  the  more  clearly 
evinced,  and  their  purposes  the  better  understood. 
The  term  "Underwriter"  is  derived  from  the 
method  adopted  in  the  earlier  period  of  the  busi- 
ness by  which  each  individual  of  an  association 
designated  his  acceptance  of  liability  on  a  given 
risk.     The  Lloyds  of  London,  originally  an  asso- 


838 

elation  of  Marine  Underwriters  at  Lloyd's  Coffee- 
house, dates  back  to  the  17th  century.    E-e- organ- 
ized in  1811,    and  by  Act  of  Parliament  incor- 
porated   in    1871,    its    main    objects    being    the 
transaction  of  the  business  of  Marine  Insurance, 
the  protection  of  the  interests  of  its  members  and 
the  collection,  publication  and  diffusion  of  intelli- 
gence and  information  with  respect  to  shipping ; 
three  prime  objects  indissolubly  joined  and  assur- 
ing the  success  of  the   undertaking.      The   care- 
fully collated  information  on  which  is  based  the 
underwriter's  estimate  as  to  character  and  rate 
and  protection  to  members   secured  by  unity  of 
action.     So  far  reaching  and  powerful  became  its 
influence  that  it  has  been  justly  designated  the 
bulwark  of  England's  greatness  in  the  Maritime 
world.     The  effect  of  these  organizations  in  more 
modern  times,   though  unknown,  or  at  least  un- 
appreciated by  the  average  citizen,  may  be  recog- 
nized   in  their    advocacy    and    support    of    such 
measures  as  tend  to  improve  the  conditions  of  the 
business  and  redound  to  the  public  good.     Fire 
ordinances  and  restrictions,  development  and  im- 
provement in  fire  department  and  water  service  ; 
and  in  this  particular  alone  the  good  work  of  these 
associations  has  been  of  incalculable  value  to  the 
people  of  every  city  and  town  of  any  importance 
in  the  country,  affording  the  desired  protection  to 


839 

their  property  and  immunity  from  the  devastating 
conflagration.  I  believe  that  I  am  justified  in  the 
assertion  that  to  these  associations  is  due  more  of 
the  credit  for  the  advances  made  in  flre-fighting 
facilities  and  improved  water  supply  which  have 
marked  the  more  recent  years,  than  to  any  other 
source. 

The  organized  insurance  companies'  rates,  based 
on  the  conditions  of  fire  protection,  was  the  force 
which  comjDelled  recognition  and  made  the  issue 
directly  between  the  citizen  and  the  civic  author- 
ity. It  was  "Old  Mother  Groose"  redivivus. 
"The  water  began  to  quench  the  fire,  the  fire 
began  to  burn  the  stick,  the  stick  began  to  beat 
the  dog,  &c."  These  facts  fully  understood  by  the 
public  as  they  should  be,  and  the  predatorious 
legislator  would  find  himself  with  his  hands  in  his 
own  pockets,  his  occuj)ation  gone,  for  the  sense  of 
justice  which  innately  belongs  to  the  American 
people  would  resent  his  unwarranted  interference. 
Improved  building  laws  and  regulations  ;  sugges- 
tions and  requirements  as  to  improvements  in 
specific  risks,  and  recognition  of  same  by  material 
reductions  in  rates.  The  Fire  Marshal,  one  of  the 
most  imj^ortant  and  valuable  officials  in  the  State 
organization,  though  efforts  in  the  direction  of 
securing  the  adoption  of  that  method  in  the  west 
have  not  met  with  any  degree  of  success,  so  far.' 


840 

The  record  of  the  efficient  services  of  that  official 
in  the  State  of  Massachusetts  alone  is  the  strongest 
argument  in  favor  of  the  system.     The  organiza- 
tion and  support  of  the  Fire  Patrol  and  Salvage 
Corps,  Watchmen  and  Detective  Service,  and  the 
means  of  punishing  arson  and  incendiarism — the 
statement  of  the  Committee  of  the  National  Board 
on  this  latter  subject  at  its  last  annual  meeting  is 
interesting,   and  I  will  quote  its  salient  points: 
"  Since  the  establishment  of  vrhat  is  known  as  the 
Incendiarism  and  Arson  Reward  Fund,  which  is 
maintained  by  a  number  of  the  companies,  through 
the  National  Board  of  Fire  Underwriters,  affording 
the  means  for  the  arrest  and  punishment  of  the 
firebug,  by  the  offer  of  a  substantial  reward  for  his 
conviction,    there   have   been  over  4,000   rewards 
offered,  amounting  to  $1,414,350.     216  have  been 
paid,   aggregating  over  $65,000,  and  resulting  in 
305  convictions.     During  the  past  year  there  were 
240  rewards   offered,    amounting  to  $71,000,  and 
eight  paid,  -aggregating  $2,400,  securing  nine  con- 
victions   with   sentences    averaging    four  years." 
This  is  part  of  the  work  of  Fire  Underwriters'  As- 
sociations carrying  the  burden  of  the  State  and  civil 
government,  not  only  regarding  proper  facilities  for 
fire  protection,  building  ordinances,  patrol  and  sal- 
vage corps,  but  police  duty  as  well,  for  all  of  these 
supported  and  fostered  by  such  organizations  and 


841 

boards  practically  extend  protection  and  relief  to 
the  entire  community.  If  these  suggestions  may  be 
accepted  as  some  of  the  results  of  organizations 
among  fire  underwriters,  may  we  not  infer  that  the 
object  and  purposes  of  such  associations  are  the 
uijbuilding  and  improvement  of  the  condition  sur- 
rounding the  business  and  all  that  is  collateral  to 
it,  rather  than  to  lower,  and  circumscribe  them. 
If  we  can  fairly  claim  that  beneficial  results  should 
indicate  a  worthy  purpose  then,  to  conduct  the 
business  in  the  safest  and  most  conservative  man- 
ner, to  estimate  and  establish  equitable  rates,  to 
inspect  and  improve  the  characters  of  risks, 
thereby  rendering  them  better  and  cheaper  to 
the  insured,  less  hazardous  as  an  exposure  to  his 
neighbor,  and  more  desirable  to  the  insuring  com- 
pany ;  to  organize  and  maintain  patrol  and  salvage 
corps,  watchman,  detective  and  police  service ;  to 
protect  the  agent  in  the  integrity  of  his  business  ; 
to  advocate  and  secure  improved  building  laws  ; 
to  examine  and  point  out  the  dangers  of  inflam- 
mable oils  carelessly  handled,  electrical  equip- 
ments improperly  installed ;  to  enlist  the  services 
of  the  trained  scientist,  the  skilled  mechanic,  the 
■expert  builder  in  devising  the  best  methods  of 
construction  and  protection,  and  to  collect  and  dis- 
seminate such  valuable  information  to  the  world, 
are  worthy  purposes  and  entitled  to  commendation 


84S 

and  support,  instead  of  mendacious  attack  and  un- 
warranted persecution. 

We  may  not  have  attained  to  that  higher  plane 
of  j)erfection  in  these  Unions  or  Boards,  they  may 
be  crude,  faulty  and  inefficient  in  many  ways,  but 
they  are  based  on  the  principle  of  the  greatest 
good  to  the  greatest  number,  and  are  doing  the 
work,  as  a  whole,  honestly  and  well.  Malcon- 
tents there  are,  and  grumblers  who  can  see  no 
good  in  any  movement  which  appears  restrictive 
to  them  no  matter  how  general  the  benefit  may  be. 
And  others  whose  devious  ways  can  never  conform 
to  a  definite  regulation.  From  such  as  these  ema- 
nate the  hue  and  cry  against  the  unholy  alliance, 
the  unrighteous  combination,  and  to  them  may  be 
ascribed,  in  part  at  least,  the  astounding  legisla- 
tion in  the  line  -ot  anti-compact  measures  which 
have  marked  the  past  fifteen  years.  Originating 
in  Michigan  in  1883  and  followed  in  1885  by  Ohio 
and  New  Hampshire,  1889  by  Kansas,  Missouri, 
Nebraska  and  Texas,  1891  by  Georgia,  1893  by 
Missouri  in  Anti-Trust  law,  which  was  amended  in 
1895  to  include  Fire  Insurance  Companies,  1896-7 
by  Iowa,  Alabama  and  Wisconsin,  1898  by  Vir- 
ginia, and  now  in  force  in  thirteen  States  of  the 
Union.  Though  known  to  you  all  and  frequently 
used,  I  cannot  refrain  from  quoting  the  language 
of  your  worthy  Vice-President  the  distinguished 


843 

Commissioner  of  Wisconsin,  in  Ms  1898  report, 
which  bears  so  strongly  upon  this  subject  :  "  There 
is  a  widespread  conviction  that  there  is  a  strong 
combination  on  the  part  of  five  insurance  com- 
panies through  Unions,  Boards  or  Underwriters' 
Association  to  fix  and  maintain  rates  and  that  the 
panacea  for  this  evil  is  the  Anti-Compact  Law.  In 
no  State,  however,  in  which  such  law  has  been 
adopted  has  it  promoted  competition  or  reduced 
rates.  Associations,  Boards  and  Unions  under  the 
present  method  of  conducting  the  business  of  fire 
insurance  are  really  a  necessity.  Without  them 
and  the  interchange  of  experience,  and  the  adop- 
tion of  correct  methods  and  uniform  practices,  the 
whole  business  of  fire  underwriting  would  become 
demoralized  and  the  policy  of  fire  insurance  be- 
come a  gambling  contract."        ^   . 

To  some  of  the  members  of  the  State  Legis- 
latures the  word  *'  corporation  "  is  the  synonym  for 
mendacity,  and  they  deal  with  it  in  accordance 
with  that  broad  and  well-known  formula,  "  Stmilia 
slinllihus  curantury  As  Mary  of  England  was 
haunted  by  the  fateful  name  Calais,  so  are  they  in 
terror  of  anything  that  echoes  corporation,  and  if 
the  word  insurance  precedes  it,  the  most  stringent 
enactments  which  their  law-making  machinery 
(working  overtime)  will  produce  can  alone  give 
them  relief.     Witness  the  repressive  and  unjust 


844 

measures  of  recent  years  ;  unequal  and  discrimina- 
tory tax  laws  ;  anti-everything  that  smacks  of  co- 
insurance, and  that  travesty  on  Justice  and  fair 
dealing,  known  as  the  Valued  Policy  Law,  which 
originated  in  this  great  State  of  Wisconsin  and 
became  epidemic  in  the  entire  sisterhood,  though 
it  did  not  take  with  all  of  them.  The  talented 
editor  of  the  Weekly  Underwriter  tersely  expresses 
his  views  of  it  as  follows :  "I  do  not  believe  the 
fire  underwriter  has  anything  to  fear  in  a  busi- 
ness point  of  view  from  a  Valued  Policy  Law  which 
merely  covers  buildings,  and  no  honest  property 
owner  has  anything  to  gain  by  it.  It  is  purely  a 
device  to  benefit  rascals,  and  the  rascals  who  own 
real  property  are  too  few  to  cut  any  figure  in  the 
total."  Nevertheless  it  is  based  on  a  glaringly 
false  principle  and  must  have  been  conceived  in 
the  brain  of  some  disgruntled  claimant  whose  over- 
insurance  proved  a  stumbling  block  to  his  honesty, 
and  whose  attempt  at  fraud  was  disclosed  by  the 
X-ray  of  investigation.  A  well  concocted  story 
poured  into  the  willing  ear  of  legislative  represen- 
tation, produced  what  was,  no  doubt,  intended  for 
a  fitting  rebuke  to  a  soulless  corporation,  and 
proved  instead  a  standing  invitation  to  arson  and 
incendiarism.  The  attention  of  the  legislatures 
seems  to  have  been  directed  solely  to  the  fire  in- 
surance combination,  though  every  business  with 


845 

which  we  are  acquainted  and  the  professions  find 
it  necessary  to  adopt  the  same  measures  for  pro- 
tection. 

The  manufacturer,  the  jobber,  the  retailer,  the 
salesman,  credit-men  and  accountants,  the  freight 
and  passenger  agent,  even  the  doctor  and  the  un- 
dertaker (the  last-named  organizer  need  not  be  re- 
garded as  a  sequent  to  the  one  which  immediately 
precedes  it  because  of  the  conjunction).  To  the 
fire  underwriter  the  condition  of  uniformity  is 
a  need,  and  if  repressive  laws  are  enacted  and  en- 
forced which  would  absolutely  prevent  it,  the  re- 
sults would  be  disastrous  not  only  to  the  com- 
panies, but  to  the  insuring  public  as  well.  The 
business  man  engaged  in  any  enterprise  requiring 
the  investment  of  capital  knows  too  well  that  the 
greatest  care  and  circumspection  is  necessary,  for  a 
slight  deviation  from  the  line  of  prudence  would 
bring  to  it  serious  injury,  if  not  total  destruction. 
Like  the  pilot  of  the  Lachine  Rapids  who,  watch- 
ful of  every  eddy  and  swirl  in  the  rushing  stream, 
realizes  that  a  moment's  hesitation  or  lack  of  vigi- 
lance would  consign  his  vessel  to  the  rocks  which 
line  his  course.  The  removal  of  the  safeguards 
of  organization  and  association  from  the  fire  insur- 
ance business  would  unquestionably  produce  like 
results.  The  margin  of  profit  is  so  narrow  that  a 
"free  for  all"   method,  with  no  restraint  on  the 


846 

reckless  or  curb  on  the  overreaching,  would  be  sui- 
cidal. Give  us  proper  supervision  outlined  by  ex- 
perience, and  it  will  receive  the  loyal  support  of 
the  companies.  You,  gentlemen,  can  do  more  in 
that  direction  through  your  knowledge  of  the  situ- 
ation and  its  requirements  than  all  else  combined. 
Educate  the  legislatures  of  your  several  States,  if 
need  be,  to  recognize  in  the  work  of  the  insurance 
companies  something  beyond  a  combination  wholly 
selfish,  in  a  necessary  association  of  interests, 
whose  influence  is  far  reaching  and  beneficial,  and 
representing  a  business  or  profession  of  greatest 
importance  to  the  commercial  world,  the  peer  of 
any  other  and  more  general  in  its  application,  cov- 
ering with  its  shield  of  indemnity  the  merchant 
prince  and  the  humblest  trader,  the  palace  and  the 
lowly  cottage,  and  proving  a  boon  indeed  to  the 
stricken  and  distressed. 


ED.  T.  OREAR  : 

In  passing  upon  this  subject  and  presenting  my 
views,  I  shall  attempt  to  express  myself  with 
utmost  fairness  and  candor  to  all  persons  con- 
cerned. I  shall  endeavor  to  treat  the  matter  in  the 
light  of  practical  business,  judgment  and  expedi- 


847 

ency.  The  force  of  the  splendid  argument  advanced 
in  support  of  such  organizations  is  properly  appre- 
ciated, but  in  view  of  numerous  weighty  considera- 
tions now  known  to  exist  and  liable  to  arise,  I  am 
forced  to  the  conclusion  that  the  question  is  indeed 
much  like  the  student's  description  of  the  "school 
marm'  s ' '  paddle  :  it  has  two  spanking  sides. 

Fire  insurance  has  grown  to  be  a  matter  of  public 
necessity,  and  is  looked  upon  as  such  by  the  busi- 
ness world  ;  in  fact,  it  has  been  so  adjudged  )^y  the 
judiciary  of  this  and  other  countries.  Considered 
then  in  that  light ;  combinations  and  unions  in  in- 
surance circles  will  necessarily  receive  the  careful 
and  prudent  supervision  of  rules  and  practices 
touching  matters  affecting  public  policy. 

From  an  "  Underwriter's  "  standpoint,  "  Unions, 
associations,  compacts,  boards  and  clubs,  in  insu- 
rance matters  are  synonymous  terms,  and  mean 
associated  effort ;  afford  uniformity  in  practice, 
and  by  virtue  of  the  strength  which  comes  to  mem- 
bers and  is  denied  to  single  individuals,  enables 
enforcement  by  agreement  that  which  a  majority 
may  regard  as  wholesome  and  safe."  This,  to  say 
the  least,  is  a  very  mild  explanation  of  all  that 
such  terms  imply,  and  to  the  unthoughtful  person 
carries  with  it  no  ear  marks  of  oppression  or  wrong. 
Yet  innocent  as  it  may  appear,  when  closely  exam- 
ined, it  will  be  found  subject  to  serious  objection 


848 

when  the  ultimate  effect  of  such  compacts  upon* 
the  public  is  taken  into  consideration.  "Com- 
binations" and  *' unions"  mean  concerted  action 
along  some  particular  line  of  business  ;  and  with 
insurance  companies  they  mean  that  certain  forms 
of  policies  shall  be  alone  issued ;  that  the  moral 
and  physical  hazard  of  certain  risks  shall  be  by  all 
adjudged  the  same  ;  that  the  same  rules  for  estab- 
lishing rates  as  applicable  to  the  different  classes 
of  risks  shall  be  adopted  by  all  and  strictly  fol- 
lowed ;  in  fact,  that  the  minimum  rate  itself  shall 
be  fixed  on  all  insurable  property ;  and  made  in- 
violate by  penalty ;  and  various  other  require- 
ments are  exacted  of  members  that  have  a  ten- 
dency to,  and  do  destroy  the  full  and  fair  competi- 
tion between  the  several  companies  to  the  compact. 
No  fault  is  to  be  found  with  associations  purely 
advisory  in  character.  On  the  other  hand,  they 
are  commended  to  the  insurance  fraternity  as  being 
entirely  wholesome,  legal  and  proper.  That  "there 
is  wisdom  in  counsel,"  no  one  is  audacious  enough 
to  deny,  and  that  insurance  as  a  business  will  be 
better  promoted  by  means  of  conventions  purely 
advisory  in  which  the  business  in  its  various  com- 
plications is  discussed  and  considered  with  a  view 
to  the  mutual  welfare  of  all,  without  attempting 
to  formulate  a  definite  plan  of  operation  and  com- 
pel its  enforcement,  is  a  fact  well  known  and  prop- 


849 

erly  appreciated  by  those  who  are  engaged  in  the 
transaction  of  any  business  out  of  which  so  many 
prudential  questions  arise.  In  this  era  of  enlight- 
enment and  activity  such  steps  are  called  forth  by 
the  natural  impulse  of  business  men  to  advance 
with  the  swift  fleeting  progress  of  the  age.  In- 
ventive genius  is  actively  engaged  in  bringing  to 
light  the  agencies  and  powers  heretofore  resting 
within  the  bosom  of  the  unknown  ;  conditions  are 
swiftly  changing  and  new  appliances  taking  fast 
hold  upon  the  commercial  and  industrial  world. 
To  meet  such  changes,  as  well  as  to  improve  upon 
former  practices,  it  is  but  natural  to  expect  those 
engaged  in  the  different  avenues  of  business  to 
hold  meetings  and  conventions  for  their  mutual 
benefit  and  for  the  well  being  of  man  in  general. 
Such  meetings  may  be  properly  characterized  as 
"the  study  room  of  the  inventor."  They  operate 
as  a  school  of  instructions  and  send  out  new 
life  which  permeates  the  entire  fraternity,  in- 
sures activity  and  improvement  and  brings  the 
world  to  a  practical  realization  of  the  fact  that 
"man  cannot  live  unto  himself."  For  those  who 
seek  to  advance  the  industrial  and  business  inter- 
ests of  the  State  and  nation  in  such  way,  all  man- 
kind must  have  a  high  regard.  They  should  by  all 
means  possible  be  encouraged,  for  it  is  the  work  of 
progress,  as  engineered  by  honest  men.     Against 


860 

them  I  have  no  charge  of  condemnation  to  urge. 
History  has  recorded  their  usefulness  in  the  past 
and  necessity  will  guarantee  them  an  unmolested 
right  of  way  in  the  future.  It  is  those  contracts, 
combinations,  pools  and  unions  by  which  a  plan  of 
action,  detrimental  to  public  good,  is  formulated 
and  obedience  thereto  enforced  that  I  most  seri- 
ously and  earnestly  condemn.  It  may  be  accepted 
as  a  rule  of  general  application  that  where  persons 
or  corporations  engage  in  the  same  kind  of  busi- 
ness, enter  into  a  contract  or  combination  for  concer- 
ted action  on  one  or  more  essential  features  of  such 
business,  it  is  done  for  selfish  and  pecuniary  mo- 
tives, to  prevent  one  from  obtaining  vantage  over 
the  others,  thus  partially  or  totally  destroying  the 
spirit  of  competition  and  rivalry  between  them. 
Such  contracts  are  injurious  to  the  public  and 
consequently  condemned  by  public  policy. 

Insurance  companies  and  underwriters  are  not  to 
be  made  exceptions  to  this  rule  ;  and  such  union  of 
forces,  whether  with  agents  or  companies,  will  not 
be  able  to  withstand  the  searching  ''X-ray"  light 
of  the  law  of  public  policy,  the  object  of  which  is  to 
suppress  everything  that  has  a  tendency  to  be  in- 
jurious to  the  public  or  against  the  public  good. 

Insurance  companies  are  corporations,  deriving  all 
their  power  by  express  or  implied  legislative  author- 
ity.   They  are  created  for  the  good  of  the  people  in 


851 

general  and  are  privileged  to  transact  no  business,  or 
bind  themselves  by  no  contract  other  than  such  as 
is  expressly  granted  or  by  necessary  implication  al- 
lowed. Being  creatures  of  legislative  will  and  en- 
gaged in  a  business  adjudged  to  be  of  public 
necessity,  the  watchful  eye  of  the  law  of  public 
policy  should  at  all  times  be  in  position  to  protect 
the  people  against  such  actions  as  will  defeat  the 
object  and  purpose  of  the  corporations,  or  inflict 
wrongs  and  hardships  upon  the  public  in  general. 

All  corporations  are  confronted  with  the  proposi- 
tion that  agreements  which  have  a  tendency  to 
regulate  and  govern  prices,  or  any  other  essential 
element  of  business  is  absolutely  void. 

When  a  corporation  is  organized  and  authority 
given  it  to  transact  a  certain  kind  of  business,  the 
people  have  the  right  to  demand  and  enforce  the 
free,  full  and  unfettered  competition  of  such  com- 
pany with  every  other  company  engaged  in  the 
same  kind  of  business.  Also,  when  insurance  com- 
panies seek  to  transact  business  in  the  several 
States,  they  should  come  in  their  individual 
capacity,  freed  from  combinations  and  alliances 
with  others  of  their  kind,  so  as  to  guarantee  full 
competition  among  themselves  in  the  transaction  of 
all  business  falling  within  the  scope  of  their  au- 
thority. They  have  no  implied  right  to  contract 
with  each  other  in  the  formation  of  compacts,  unions 


852 

and  boards  by  wliich  they  are  to  be  jointly  gov- 
erned in  the  exercise  of  their  corporate  franchise  ; 
nor  will  they  be  permitted  to  act  in  such  way  as 
would  destroy  that  spirit  of  business  rivalry  and 
competition  which  necessarily  follows  individual 
and  severed  corporate  activity. 

The  duties  which  insurance  companies  owe  to  the 
public  and  which  constitute  in  part  the  considera- 
tion upon  which  their  privileges  are  conferred,  can- 
not be  avoided  by  combinations  with  each  other  that 
have  a  tendency  to  destroy  their  functions,  maim 
and  cripple  separate  activity  and  take  away  their 
free  and  independent  action,  thereby  affecting  un- 
favorably the  general  interests  of  the  public. 

It  has  been  suggested  that  there  are  many  safe, 
sound  and  conservative  reasons,  favorable  to  such 
organizations  and  the  public  ;  yet  that  the  evident 
tendency  of  such  combinations  is  to  destroy  rivalry 
among  the  parties  thereto  and  prevent  that  active 
competition  which  should  and  would  otherwise 
naturally  exist,  is  a  fact  which  we  must  not  over- 
look. While  it  may  appear  that  by  upholding  the 
agreement,  union,  board  or  compact  as  the  case 
may  be,  the  companies  will  be  able  to  do  a  safer 
business  and  thereby  give  the  insured  better  and 
safer  insurance,  yet,  such  is  not  and  cannot  be  the 
principle  by  which  business  of  this  character  is  to 
be  governed.    The  proposition  may  seem  plausible 


853 

and  reasonable,  but  the  natural  tendency,  aim  and 
effect  of  sucli  combinations  towards '  conditions 
highly  prejudicial  and  unworthy  are  not  to  be  lost 
to  our  view.  The  policy  of  our  law  is  to  encourage 
commercial  and  business  rivalry  on  the  ground  that 
it  promotes  business  health  and  activity.  The  first 
aim  should  be  to  protect  public  interest,  and  after 
that  individual  rights  ;  hence,  anything  that  has  a 
tendency  to  impose  upon  or  cripx)le  the  public  wel- 
fare will  not  be  upheld. 

It  has  been  said  upon  good  authority  that  a  con^ 
tract  which  destroys  rivalry  in  business  and  stifles 
competition  in  fixing  rates  of  insurance  is  as  preju- 
dicial to  public  interest  as  if  it  were  a  combination 
of  merchants  and  tradesmen  to  maintain  an  unalter- 
able standard  for  the  price  of  any  particular 
article.  To  condemn  a  combination  formed  to  pre- 
vent competition  in  the  furnishing  of  material  used 
in  the  construction  of  a  house,  or  in  the  work  of  its 
erection,  and  yet  uphold  that  which  will  prevent 
competition  in  insuring  it,  is  to  lose  sight  of  the 
substance  and  pursue  the  shadow. 

The  law  by  reason  of  its  adaptability  is  able  to 
meet  and  does  meet  the  varying  phases  of  all  busi- 
ness transactions,  and  wherever  any  contract  is 
entered  into,  the  ultimate  tendency  of  which  is  to 
destroy  competition  and  stifle  trade,  or  break  down 
the  barriers  against  pools  and  combinations,   no 


854 

sanction  will  be  given  to  it  by  the  courts  of  the 
country. 

That  competition  is  the  life  of  trade  is  not  the 
language  of  the  street  alone,  but  a  proverb  in  law. 
If  all  insurance  companies  had  the  same  capital, 
made  the  same  investments,  transacted  the  same 
amount  and  character  of  business,  had  the  same 
number  of  officers  and  maintained  themselves  at 
the  same  expense,  there  might  be  some  propriety 
in  making  the  statement  that  there  is  no  room  for 
competition  or  for  a  varying  standard  of  rates. 
But  this  is  not  true.  The  reasons  that  I  have 
already  presented  naturally  suggests  to  all  that 
there  is  as  much  room  and  need  for  competition  in 
the  insurance  business,  as  in  any  other  avenue  of 
trade.  Granting,  for  the  sake  of  argument,  the 
proposition  that  the  laws  of  safe  business  require  a 
fixed  standard  of  rates  to  which  all  companies 
should  in  strict  integrity  adhere,  I  submit  the 
question,  would  it  be  fair  and  satisfactory  to  per- 
mit such  standard  to  be  fixed  and  controlled  by  the 
companies  alone,  while  the  other  parties,  the  in- 
sured, and  the  general  public  who  are  equally  in- 
terested, are  not  to  be  consulted  ?  The  insured  is 
as  deeply  interested  in  the  matter  as  the  company 
or  the  underwriter.  Good  business  policy  tells 
him  to  pay  no  more  for  his  insurance  than  is  neces- 
sary to  guarantee  perfect  security  against  loss  and 


856 

at  the  same  time  enable  the  company  to  transact  a 
safe, ^conservative  and  fairly  profitable  business. 
He  is  alsoifgreatly  concerned  that  no  one  will  un- 
dertake to  uphold  a  policy  that  enables  the  com- 
panies to  fix  the  rate  to  be  paid  by  him  without 
consulting  and  advising  with  him  as  to  what  the 
proper  rate  should  be.  Along  this  line  I  desire  to 
particularly  admonish  companies  and  underwriters. 
I  dojnot  believe  that  insurance  companies  in  gene- 
ral are  [anxious  to  see  an  iron  standard  of  rates 
fixed  and  followed  by  all  ;  but  if  unions,  combina- 
tions, compacts  and  clubs  are  continuously  created 
and  insisted  upon  as  being  necessary  for  the  welfare 
of  both  company  and  the  insured,  the  evident  ten- 
dency and  effect  of  which  would  be  to  beat  down 
opposition  and  destroy  all  competition,  it  will  not 
be  long  before  the  people  in  the  exercise  of  a 
sovereign  power,  will  by  legislative  enactment 
in  the  several  states,  ordain  that  such  shall  be  done 
in  a  very  different  manner  than  that  contemplated 
by  the  companies.  Authority  will  be  conferred  upon 
some  department  of  the  State  government  by  which 
the  standard  of  rates  shall  be  fixed  in  a  manner 
both  impartial  and  adequate,  without  the  consent 
of  the  companies  thereto.  As  a  matter  of  example 
it  may  be  said  that  the  business  of  a  ''public 
carrier"  stands  on  the  same  footing  as  that 
of   the  insurance  company.      They  are  both  con- 


856 

sidered  matters  of  public  necessity,  over  which  the 
State  on  grounds  of  self -protection  and  public  pol- 
icy, should  have  legislative  supervision.  The  peo- 
ple of  the  several  States  in  their  wisdom  have  con- 
sidered it  advisable  for  their  own  good  to  regulate 
and  control  the  maximum  freight  and  passenger 
charges  and  compel  obedience  thereto  by  all  the 
railroad  companies,  under  severe  penalties.  Is  it 
not  probable  that  the  same  reasons  which  prompted 
the  one,  will  prompt  the  other?  I  do  not  ap- 
prehend a  disposition  upon  the  part  of  the  people 
to  assert  any  such  authority.  In  fact,  good  judg- 
ment advises  against  it,  so  long  as  the  companies 
do  not  interfere  by  undertaking  to  establish  such 
fixed  rates  as  deprive  the  x>eople  of  the  fruits  of 
wholesome  and  vigorous  competition.  There  is  no 
cause  for  alarm  ;  the  people  have  never  yet  asserted 
themselves  in  such  way  unless  there  was  an  imper- 
ative demand  and  necessity  for  it.  They  stand 
pledged  to  the  principle  that  all  such  matters  will 
properly  regulate  themselves  when  kept  free  from 
combinations  and  improper  influences.  But  should 
they  be  forced  to  quiet  the  arm  of  such  corpora- 
tions and  prevent  the  formation  of  a  conspiracy, 
which  would  operate  harshly  upon  the  business  in- 
terests of  the  country,  by  the  establishment  of  an 
arbitrary  standard  of  rates  for  the  comi^anies,  it 
would  be  accomplished   without    regard    to    the 


857 

special  interests  of  any  class  and  witli  a  proper  and 
impartial  consideration  of  the  welfare  of  all. 

It  therefore  becomes  essential  for  all  companies 
to  require  their  agents  and  underwriters  to  depend 
upon  their  own  exertions  in  the  open  field  of  busi- 
ness rather  than  to  undertake  to  secure  their  re- 
spective shares  of  the  business  by  means  of  clubs, 
unions  and  combinations,  which  are  repulsive  alike 
to  the  people  and  the  spirit  of  our  institutions. 
By  this  policy  there  will  be  no  ill  feeling  created  in 
the  minds  of  the  people  against  the  companies  and 
no  necessity  for  State  interference  and  supervision 
of  rates. 


THE  INCONSISTENCIES  OF  FIRE  INSUR- 
ANCE   LEGISLATION. 


W.  H.  MYLREA  : 

npHE  topic  is  one  full  of  suggestion.  The  legis- 
^  lative  enactments  of  this  country  for  the  past 
fifty  years  would  furnish  illustrations  for  a  volume. 
The  statute  books  of  the  different  States  contain 
many  acts  which  in  future  years  may  be  classed 
with  the  famous  *'Blue  Laws"  of  Connecticut. 
The  excuses  for  their  enactment  are  many.  The 
ignorance  and  wilful  prejudice  of  the  average 
legislator  will  account  for  many,  and  no  small 
number  is  due  to  the  unconscionable  conduct  of 
men  engaged  in  some  kinds  of  so-called  insurance. 
The  language  is  strong  but  this  assembly  ought  to 
be  representative  and  meet  these  questions  frankly. 
The  commissioner  of  insurance  of  a  State  who 
pays  any  attention  to  the  duties  of  his  office  must 
become  more  or  less  familiar  with  the  statutes  of 
his  State.  He  knows  full  well  that  many  of  the 
laws  which  he  is  called  upon  to  execute  are  unwise 


859 

and  far  from  bringing  the  best  results  to  the 
people  of  his  State.  He  is  not  the  maker  of  these 
laws  and  should  not  be  blamed  for  their  crudity  or 
inefficiency.  The  lire  insurance  interest  is  one 
specially  vital  to  the  modern  business  man  as  well 
as  to  every  property  owner  in  the  land. 

With  the  time  at  his  disposal,  the  writer  can  not 
be  expected  to  be  always  correct  in  his  citations. 
Some  of  the  statutes  criticised  may  have  been 
amended  or  repealed.  If  so,  due  apology  is 
offered,  accompanied  with  the  commendation  for  a 
body  that  recognizes  its  error  and  seeks  its  remedy. 
Statutory  law  is  always  in  process  of  change  and 
follows  in  the  footsteps  of  the  experience  of  the 
people. 

It  has  been  suggested  somewhere  that  chairs  of 
insurance  should  be  endowed  in  our  large  univer- 
sities. We  have  schools  which  teach  more  or  less 
of  bookkeeping  and  banking.  Every  college  grad- 
uate must  devote  some  time  to  the  study  of  politi- 
cal economy.  In  that  course  he  is  taught  the  gen- 
eral principles  underlying  the  laws  of  finance.  He 
is  generally  given  also  a  course  in  international  law, 
which  is  proper.  In  regard  to  insurance,  which 
reaches  into  every  department  of  business  life,  he 
is  given  not  a  word.  He  is  taught  more  about  his 
rights  within  the  domain  of  a  foreign  nation  than 
of  the  rights  and  benefits  to  be  had  from  a  proper 


860 

knowledge  of  the  principles  of  insurance.  He 
never  expects  to  be  called  upon  to  maintain  his 
rights  in  Asia,  but  he  is  so  uninformed  as  to  the 
true  principles  of  insurance,  that  he  will  quickly 
take  a  policy  in  any  scheme  wiiich  will  promise 
him  something  for  nothing  at  his  fellow's  expense. 
It  is  certainly  one  of  the  subjects  which  should  be 
taught  somewhere  in  the  institutions  of  learning  in 
this  country.  It  is  certainly  unfortunate  that  the 
young  men  of  this  country  should  be  sent  forth 
into  the  world  to  obtain  all  their  knowledge  of  in- 
surance in  the  school  of  experience,  a  school  which 
receives  the  highest  priced  tuition  for  the  learning 
imparted.  The  people  owe  it  to  themselves  to  so 
understand  the  question  of  insurance  as  not  to  be 
burdened  with  unnecessary  premiums  or  induced 
to  enter  into  contracts  which  can  have  no  other  re- 
sult than  to  enrich  the  officer  and  place  holder  of  a 
corporation  until  the  affairs  of  that  association  are 
turned  over  to  a  receiver.  Every  burden  placed 
upon  the  company  is  paid  by  the  policy-holder 
whether  in  stock  or  mutual  company. 

Some  months  since,  quite  a  prominent  citizen  of 
Wisconsin  visited  the  writer,  and,  among  other 
things,  complained  of  the  enormous  rates  charged 
for  fire  insurance.  He  admitted  that  he  was  an 
advocate  of  anti-co-insurance  clauses,  valued  pol- 
icy   laws,     an ti- compact    agreements,    etc.      The 


861 

proposition  was  made  that  he  engage  in  the  busi- 
ness himself.  It  was  ascertained  from  our  statutes 
that  all  that  was  necessary  was  a  cash  capital  of 
one  hundred  thousand  dollars  to  be  invested  in  in- 
terest bearing  securities,  the  income  of  which  was 
to  be  paid  into  a  common  fund  with  the  premiums 
received  u]3on  policies  of  insurance.  When  the 
question  of  rates  was  reached,  he  admitted  that 
these  must  be  sufficient  to  pay  losses  and  expenses 
and  a  profit  on  the  business,  on  account  of  the 
risk.  These  must  be  collected  over  and  above  any 
sum  received  on  the  capital,  because  the  capital 
was  only  a  guarantee  to  its  policy-holders  that  the 
managers  of  the  company  would  make  the  venture 
pay  its  own  way.  He  understood  then  as  never 
before,  that  every  tax  and  burden  put  upon  the  in- 
surance company  was  put  upon  the  business  and 
paid  by  the  policy-holder ;  that  to  exact  exorbi- 
tant taxes  for  the  State  from  the  premiums  was  as 
wise  as  the  Irishman  who,  when  asked  to  ride  in  a 
carriage,  insisted  on  holding  his  pack  in  his  lap  in 
order  to  lighten  the  burdens  of  the  team. 

Complaints  are  made  in  Wisconsin  continually 
as  to  rates.  We  have  here  valued  policy  laws  and 
others  of  that  character.  One  of  the  ablest  gov- 
ernors of  the  State  urged  upon  the  Legislature  the 
repeal  of  the  valued  policy  laws,  and  pointed  out 
how  the  people  of  Wisconsin  were  paying  a  large 


862 

amount  of  premiums  on  account  thereof,  but  the 
legislature  in  their  wisdom,  declined.  There  is  no 
reason  of  public  or  private  policy  which  can  be 
given  to  justify  any  policy-holder  receiving  a  sum 
greater  by  way  of  indemnity  than  the  actual  loss 
sustained.  The  common  argument  in  favor  of  the 
valued  policy  law  is  that  the  company  ought  not 
to  have  issued  a  policy  for  a  greater  sum  than  the 
value  of  the  property.  The  answers  to  this  argu- 
ment are  two :  First,  an  agent  capable  of  valuing 
every  piece  of  property  in  a  community  is  a  man 
of  such  judgment  and  experience  as  will  be  too 
valuable  to  be  engaged  in  the  business  of  soliciting 
risks  ;  and,  second,  that  it  is  more  economical  for 
the  public  to  appraise  the  value  of  an  occasional 
loss  rather  than  to  appraise  once  in  each  year  all 
the  insured  property  in  the  community.  In  either 
case  the  expense  is  borne  by  the  policy-holder  and 
while  in  the  former  case  this  expense  would  be  but 
nominal,  in  the  latter  it  would  be  burdensome. 

Who  can  give  us  the  amount  that  must  be 
added  to  the  premiums  of  Wisconsin  each  year 
to  pay  the  amount  of  the  increased  losses  on  ac- 
count of  this  statute  ?  No  one  denies  such  losses. 
The  amount  is  large  but  indefinite.  These  amounts 
are  largely  speculative  from  year  to  year,  and 
the  companies  must  charge  enough  in  anticipation 
to  pay  them.     The  company  fortunate  enough  to 


863 

escape  paying  these  losses  receives  a  larger  profit 
at  the  expense  of  the  premium  payer. 

In  Iowa,  the  amount  of  the  policy  upon  real 
estate  i^  prima  facie  evidence  of  the  value  of  the 
building  destroyed.  If  a  total  loss  is  settled  or 
appraised  for  less  than  the  amount  written,  the 
insurer  must  return  a  pro  rata  share  of  the  pre- 
mium. Why  is  not  this  a  valued  policy  law  equally 
fair  to  both  parties  of  the  contract  ?  The  moral 
hazard  is  wanting,  and  the  company  only  receives 
such  a  premium  as  is  actually  earned. 

About  the  year  1894  the  legislature  of  Massa- 
chusetts provided  for  the  office  of  fire  marshal.  The 
system  had  been  in  use  in  the  city  of  Boston  for 
some  time,  and  in  that  year  was  extended  to  the 
State.  His  annual  reports  show  that  the  unknown 
causes  of  fires  vary  from  ten  to  nearly  forty  per  cent. 
In  his  report  for  1896  he  says  : 

*'  One  of  the  most  serious  evils  in  connection  with 
the  protection  of  the  individual  property  holder 
against  loss  by  fire  is  that  of  the  torch  of  the  in- 
cendiary." 

The  commissioner  of  insurance  in  that  State  in 
the  same  year  says  in  his  report  that : 

**  The  marshal  is  unquestionably  correct  in  his 
expression  of  opinion  that  to  a  very  considerable 
degree  incendiarism  grows  out  of  over- insurance." 

He  also  speaks  of  the  report  made  to  his  depart- 


864 

ment  by  a  town  clerk  as  to  the  cause  of  a  certain 
fire,  who  said  it  was  undoubtedly  due  to  the  "  fric- 
tion caused  by  a  very  small  stock  of  goods  rub- 
bing up  against  a  very  large  insurance  policy.'^ 
This  is  equal  to  the  famous  case  in  Wisconsin, 
where  the  loss  of  a  grist  mill  in  the  winter  time 
was  accounted  for  by  the  friction  of  the  water  wheel 
against  the  ice  in  the  stream. 

In  the  fire  marshal's  report  for  1897,  in  speaking 
of  convictions  for  setting  incendiary  fires,  he  says 
that  : 

*'  One  had  set  eight  fires,  two  had  set  forty  fires 
with  a  loss  of  one  and  one-half  million  dollars,  and 
one  had  set  twelve  fires  with  a  loss  of  one  hundred 
thousand  dollars.  Another  had  collected  insurance 
fifteen  times  upon  the  same  goods." 

These  losses  were  paid  from  the  premiums  of 
policy-holders.  The  conditions  in  Massachusetts 
are  undoubtedly  the  conditions  of  other  States. 
Only  the  dishonest  man  will  over-insure  his 
property  or  claim  a  loss  greater  than  he  suf- 
fers. To  legislate  in  favor  of  this  class  by  valued 
policy  laws  would  almost  justify  the  statement  that 
members  of  the  legislature  enact  statutes  in  their 
own  behalf. 

The  legislatures  of  the  several  States  are  continu- 
ally passing  laws  punishing  individuals  for  violat- 
ing the  laws  of  morality.     One  of  the  greatest 


865 

elements  of  insurance  is  the  moral  hazard.  Good 
public  policy  demands  that  the  legislature  should 
in  every  possible  way  protect  public  morals.-  The 
legislature  should  ever  have  in  mind  the  rule  that 
no  man  under  any  circumstances  must  be  permitted 
to  iDrofit  by  his  own  wrong. 

The  object  of  all  legislation  should  be  simply 
regulative.  This  includes,  of  course,  the  raising  of 
revenue  for  the  support  of  the  government.  The 
legislative  regulation  ought  not  to  be  narrow  or 
ill-advised.  It  should  be  broad  and  liberal.  On 
every  hand  is  heard  the  criticism  of  corporations 
and  the  injust  use  of  their  powers.  Some  of  these 
criticisms  are  just  and  many  are  the  result  of  igno- 
rance of  sufficient  facts  on  which  to  base  an  intelli- 
gent judgment.  One  is  sometimes  almost  made  to 
believe  that  the  abolishment  of  corporations  would 
correct  all  the  evils  of  modern  society.  The  growth 
of  corporations  in  the  management  of  private  affairs 
has  been  gradual  and  has  come  to  stay.  The  abuses 
of  cori3orate  rights  by  unscrupulous  men  can  only 
be  met  by  wise  regulation.  One  of  the  greatest 
problems  of  modern  times  is  the  proper  regulation 
of  corporations,  with  due  regard  to  public  and 
private  interests.  Each  corporation  is  the  creature 
of  the  State  and  the  sovereign  power  of  that  State 
is  ever  ready  when  invoked  to  control  the  corpora- 
tion  and  keep  it  within  its  proper  powers.     It 


866 

should  be  the  aim  of  every  member  of  the  legisla- 
ture to  vote  only  for  such  measures  as  will  truly 
enable,  the  corporation  to  accomplish  its  purpose, 
and  not  to  use  legislation  in  regard  to  corporations 
for  the  sole  purpose  of  revenue  and  to  unduly 
burden  one  of  the  modern  agencies  of  business. 

The  laws  of  New  Mexico  require  an  insurance 
company  organized  outside  of  that  State  to  deposit 
ten  thousand  dollars  cash  (without  interest  of 
course),  in  the  State  or  some  county  treasury,  or 
in  lieu  thereof,  bonds  of  the  United  States  or  of 
that  State,  or  some  county  thereof,  and  invest  its 
surplus  in  the  same,  or  ' '  other  indebtedness  of 
any  solvent,  dividend-paying  institution,  incor- 
porated under  the  laws  of  the  Territory  or  of  the 
United  States."  This  certainly  is  not  a  law  of 
regulation,  nor  was  it  passed  for  the  purpose  of 
protecting  the  patron  of  any  fire  insurance  com- 
pany. There  could  be  but  one  object  of  such 
legislation,  and  that  was,  to  market  by  force  se- 
curities and  '' indebtedness  of  any  solvent,  divi- 
dend-paying institution,  incorporated  under  the 
laws  of  the  Territory,"  which  ought  to  be  viewed 
with  suspicion  by  every  conservative  investor. 
Under  this  law  the  surplus  of  a  company  author- 
ized to  do  business  in  New  Mexico  could  be  in- 
vested in  the  mining  stocks  of  some  wild  cat  com- 
pany of  that  State  and  be  solvent.     If,  however, 


867 

this  surplus  be  invested  in  the  first  mortgage  gold 
bonds  of  railways  like  the  New  York  Central,  the 
insurance  company  is  declared  by  the  law  of  that 
State  to  be  insolvent  and  unable  to  pay  its  in- 
debtedness. Comment  is  unnecessary.  The  result 
of  such  legislation  must  be  that  companies  which 
would  make  such  reckless  investments  would  be 
equally  reckless  in  their  risks  and  payment  of 
losses.  Their  policies  must  sooner  or  later  prove 
to  the  holder  a  rope  of  sand,  or  an  executory  in- 
vitation to  file  his  claim  with  some  receiver,  and 
accept  whatever  is  left  after  attorneys  have  found 
no  further  cause  of  profit  in  litigation.  Such  re- 
strictive legislation  is  on  a  par  with  that  of  Spain 
three  hundred  years  ago,  when  her  statesmen 
enacted  a  death  penalty  for  exporting  gold  and 
silver  from  the  realm,  upon  the  theory  that  its 
sole  retention  within  the  kingdom  would  make 
the  nation  the  ruler  of  the  financial  world. 

The  Territory  also  requires  that  a  synopsis  of 
the  annual  statement  be  published  in  a  paper  in 
each  county  where  the  company  is  engaged  in 
the  business  of  underwriting.  That  statute  was 
not  passed  in  the  interest  of  the  policy-holders, 
but  to  increase  the  revenue  of  local  newspapers. 
Even  when  admitted  to  do  business  in  the  Ter- 
ritory, the  company  is  limited  to  do  business  in 
such  counties    only    in  which  it    has   appointed 


868 

local  agents.  To  be  consistent,  they  should 
amend  this  statute  and  provide  that  the  company- 
should  appoint  every  man  an  agent  to  write  his 
own  insurance  policy. 

A  majority  of  the  members  of  the  legislatures 
of  the  several  States  must,  in  the  nature  of  things, 
be  men  of  limited  experience.  It  follows  that 
any  legislation  of  theirs  must  be  the  measure  of 
their  own  experience.  A  good  illustration  of 
this  was  brought  to  the  writer's  attention  during 
the  past  summer.  In  a  number  of  the  States  are 
statutes  known  as  ''anti-co-insurance  clauses." 
The  object  of  this  legislation  is  to  prohibit  in- 
surance companies  from  requiring  a  co-insurance 
clause ;  or,  in  other  words,  limit  in  any  way  the 
amount  of  their  policy,  either  as  to  amount  or 
the  property  upon  which  it  is  written.  A  cor- 
poration of  this  country  which  bought  and  ex- 
ported large  quantities  of  flour  and  other  food 
products  in  several  of  the  States,  which  products 
were  being  continually  moved  from  one  place  to 
another,  applied  to  its  broker  in  New  York  City 
for  insurance  to  the  amount  of  half  a  million 
upon  its  property.  The  owners  were  unable  to 
locate  the  property  or  specify  its  exact  value, 
because  the  same  was  continually  changing  loca- 
tion and  fluctuating  in  value.  There  was  no 
difficulty  in  obtaining  the  insurance  with  the  co- 


869 

insurance  clause,  for  the  reason  that  with  that 
agreement  attached  it  amounted  to  making  all 
the  policies  issued  equivalent  to  individual  poli- 
cies upon  specific  amounts.  If  the  companies 
could  not  have  attached  the  co-insurance  clause, 
it  would  have  required  a  great  deal  of  time  to 
secure  the  several  policies  and  attend  to  all  the 
changes  that  must  be  made  in  the  policies  with 
every  change  in  location  or  in  the  value  and 
amount  of  property  insured.  In  that  case  the 
co-insurance  clause  was  undoubtedly  attached  to 
property  in  States  prohibiting  the  same.  State 
boundaries  cannot  stay  the  progress  of  legiti- 
mate business.  The  thought  I  desire  to  impress 
is  this,  that  the  co-insurance  clause  is  the  result 
of  the  demands  of  modern  business,  and  not  an 
instrument  upon  the  part  of  insurance  companies 
to  obtain  premiums  without  returning  an  equiv- 
alent therefor.  In  the  case  in  question,  had  the 
property  been  located  in  fifteen  different  places,  a 
single  policy  without  the  co-insurance  clause  must 
have  been  in  effect  fifteen  separate  policies  upon 
fifteen  different  pieces  of  property,  and  the  equitable 
premium  to  be  charged  must  have  been  the  gross 
amount  of  fifteen  premiums  upon  fifteen  separate 
risks.  With  a  co-insurance  clause,  the  premium 
could  be  upon  one  risk,  and  yet  the  policies  of  all 
the  companies  would  cover  all  the  property  insured. 


870 

The  fairest  co-insurance  law  to  be  found  was 
passed  by  the  legislature  of  Wisconsin  in  1897. 
It  requires  the  insurance  companies  upon  demand 
of  the  insured  to  make  rates  with  or  without  such 
a  clause  attached  to  the  policy.  It  is  then  optional 
with  the  insured  to  choose  whether  or  not  he 
wishes  the  lower  rate  with  the  co-insurance  clause 
attached. 

In  1897,  the  legislature  of  Wisconsin  passed  an 
anti-compact  law,  but  provided  that  the  board  of 
underwriters  in  any  city  or  village,  and  in  case 
there  was  not  such  board,  that  the  local  agents, 
might  establish  a  table  of  uniform  rates.  It  was 
hoped  that  this  would  accomplish  all  the  purposes 
of  the  usual  anti-compact  law,  and  at  the  same 
time  make  a  board  that  would  give  fair  rates  not 
only  to  the  company  but  to  the  assured.  Like 
'  many  another  legislative  enactment  which  appears 
good  in  theory,  practice  and  experience  demon- 
strated a  condition  of  affairs  unlooked  for.  Soon 
after  this  law  was  enacted,  its  defects  were  appar- 
ent. As  is  well  known  in  the  business  world,  it  is 
the  custom  of  large  concerns  to  give  their  insurance 
to  one  agency,  in  order  to  avoid  the  necessity  of 
looking  after  renewals,  etc.  Firms  so  placing  their 
insurance  permit  the  local  agency  to  divide  it 
among  the  several  companies  represented  by  the 
local  agent,  and  give  the  surplus  lines  to  other  local 


871 

agencies.  As  soon  as  the  local  boards  were  organ- 
ized, agents  who  had  no  share  in  this  business,  and 
willing  to  resort  to  any  method  for  increased  busi- 
ness, approached  property  owners  and  informed 
them  that  unless  they  were  given  a  share  of  this 
insurance,  as  members  of  the  local  board  they 
would  vote  to  raise  the  rates,  in  order  to  punish 
the  owner  for  not  dividing  the  insurance.  This 
would  give  the  agent  who  was  just  commencing  in 
business  the  same  advantage  as  the  man  who  had 
spent  a  lifetime  in  building  up  a  clientage,  and  at 
the  same  time  compel  all  large  insurers  to  deal  with 
all  the  local  agencies  in  a  city,  instead  of  with  one. 
In  1895,  the  legislature  of  Alabama  passed  a  law 
providing  that  in  case  of  any  defense  to  a  life 
policy  upon  the  ground  of  false  representations,  or 
any  defense  showing  that  the  contract  was  void  in 
its  inception,  that  before  the  company  could  file 
such  an  answer  in  court  it  must  deposit  all  the 
premiums  received.  In  case  judgment  was  for  the 
defendant  the  money  deposited  in  court  should  be 
repaid  to  the  defendant,  less  the  fees  of  the  court 
to  be  deducted  therefrom.  This  act  is  entitled  : 
''  An  Act  to  regulate  defenses  to  actions  on  policies 
of  life  insurance."  It  may  be  extended  either  in 
Alabama  or  other  States  to  fire  insurance  companies, 
as  there  is  no  reason  why  the  same  rule  should 
not  be  applied.     The  writer  would  like  to  have  the 


872 

author  of  such  a  measure  explain  to  the  public  why 
the  same  rule  should  not  apply  to  similar  contracts 
between  private  citizens.  The  sum  and  substance 
of  this  statute  is  to  guarantee  to  the  man  who 
fraudulently  procures  a  policy  of  life  insurance 
that  he  may  have  the  benefit  of  his  fraud  if  he  is 
not  detected  ;  and  if  he  be  detected  he  shall  have 
the  right  to  recover  a  part  of  his  money  in  order  to 
enable  him  to  make  another  attempt  to  obtain  the 
fruits  of  his  own  misconduct. 

In  1897,  the  legislature  of  the  same  State  passed 
a  law  to  more  effectively  protect  "the  people" 
against  combinations,  etc.  In  that  statute  I  find 
the  following  provision  that : 

"1^0  stipulation  or  agreement  in  such  contract 
or  policy  of  insurance  to  arbitrate  loss  or  damage, 
nor  to  give  notice  or  make  proofs  of  loss  or  damage, 
shall  in  any  such  case  be  binding  on  the  assured  or 
beneficiary,  but  right  of  action  accrues  immedi- 
ately upon  the  loss  or  damage." 

The  experience  of  over  one  hundred  and  fifty 
years  of  fire  insurance  has  taught  the  business  men 
of  England  and  this  country  that  it  is  cheaper  and 
more  effective  to  ascertain  the  amount  of  a  loss  by 
means  of  arbitrators  and  appraisers,  rather  than 
by  the  clumsy  machinery  of  a  court  and  jury.  The 
courts  have  universally  upheld  and  approved  a 
stipulation  in  a  policy  which  provides  for  the  ascer- 


873 

tainment  of  the  amount  of  the  loss,  leaving  the 
liability  of  the  company  to  be  adjudicated  by  the 
courts. 

The  object  of  requiring  notice  of  loss  is  to  en- 
able a  representative  of  the  other  party  to  the  con- 
tract of  insurance  to  come  upon  the  scene  and  for 
himself  to  verify  the  amount  of  the  loss,  at  the 
time  when  such  action  can  best  be  taken  to  pre- 
serve the  rights  and  interests  of  both  parties.  The 
proofs  of  loss  were  required  to  be  made  by  the 
assured  for  the  sole  reason  that  the  owner  of  the 
property  was  the  only  party  in  possession  of  all 
the  facts  as  to  the  particular  items  of  property  de- 
stroyed ;  and  it  was  found  that  justice  was  better 
served  by  requiring  him  to  make  a  formal  state- 
ment thereof  than  to  leave  the  insurer  to  ascertain 
these  facts  without  the  aid  of  the  assured.  Were 
all  men  honest  and  upright  and  not  prejudiced  by 
self-interest,  there  might  be  some  excuse  for  abol- 
ishing from  the  contract  the  provision  for  notice 
and  proofs  of  loss.  Perhaps  the  state  of  Alabama 
is  inhabited  by  a  class  of  people  different  from 
other  states  in  the  Union,  but  the  writer  has  no  in- 
formation thereof.  Judging  from  the  character  of 
their  legislation  upon  questions  of  insurance,  they 
would  seem  rather  to  belong  to  that  class  who 
think  that  by  some  legislative  act  they  can  procure 
something  for  nothing. 


874 

Another  phase  of  legislation  that  should  be 
corrected  relates  to  the  re -insurance  reserve 
of  fire  insurance  companies.  It  is  the  usual 
practice  of  all  fire  insurance  companies  to  return 
as  a  re-insurance  reserve,  one-half  of  the  prem- 
iums collected,  upon  the  theory  that  they  have 
collected  a  sufiicient  rate  to  pay  losses  and  ex- 
penses. Also  that  one-half  of  the  insurance  con- 
tracted is  in  the  main  earned,  and  that  one-half 
of  each  policy  is  yet  to  run.  The  true  legisla- 
tion in  regard  to  re -insurance  reserves  ought  to 
be  that  they  should  be  required  to  have  on  hand 
an  amount  sufiicient  to  re-insure  all  their  risks 
in  some  good  solvent  insurance  company.  Such 
is  the  rule  in  some  of  the  States,  and  especially 
in  the  State  of  Wisconsin.  It  sometimes  occurs 
that  a  combination  is  entered  into  to  crush  a 
weak  competitor  by  the  insurance  companies 
having  large  capital  and  an  extended  field  of 
business.  This  they  do  in  the  locality  of  some 
smaller  company  by  writing  business  at  an  un- 
profitable figure  for  the  express  purj)ose  of  bank- 
rupting their  competitor  and  obtaining  the  field 
for  themselves.  An  illustration  of  this  occurred 
during  the  rate  war  in  the  city  of  New  York  dur- 
ing the  present  summer.  A  policy  of  one  hun- 
dred thousand  dollars  was  written  for  five  years 
upon  one  risk  for  a  premium  of  eight  hundred 


875 

dollars,  upon  which  the  company  paid  a  com- 
mission of  three  hundred  and  twenty  dollars.  A 
single  fire  in  a  room  containing  costly  curtains 
and  carpets,  which  might  be  ignited  from  a  num- 
ber of  trifling  causes,  would  cost  the  company 
more  than  the  premium  received.  No  company 
could  write  all  its  business  at  such  figures  and 
pay  the  losses  from  its  premium  account.  The 
result  is  that  it  must  on  some  other  locality 
charge  more  than  a  lawful  rate,  and  thereby 
cast  the  burdens  of  one  community  upon  an- 
other. If  the  statute  be  the  same  as  the  one 
in  Wisconsin,  the  commissioner  of  insurance 
could  call  for  a  list  of  the  policies  of  the  com- 
pany, procure  the  same  to  be  rated  or  valued, 
and  fix  the  re-insurance  reserve  by  the  standard 
cost  of  re-insurance,  rather  than  one-half  of  the 
premiums.  If  a  company  engaged  in  this  un- 
lawful business  to  any  large  extent,  it  might  find 
itself  not  only  minus  a  surplus,  but  with  an  im- 
paired capital,  and  be  obliged  to  withdraw  from 
business  until  the  impairment  was  made  good. 

Attention  is  called  to  another  statute  of  New 
Mexico.  An  act  was  passed  prohibiting  any  in- 
crease over  the  rates  established  on  the  first  day 
of  January,  1897.  Imagine  the  wisdom  of  the 
members  of  the  legislature  of  the  State  of  New 
Mexico  when  they  can  say  by  their  public  acts, 


876 

"  a  fair  rate  had  been  established  all  over  the 
State  of  New  Mexico,"  and  that  no  matter  what 
may  be  the  change  of  conditions  in  after  years, 
the  rate  established  is  correct.  Suppose  experi- 
ence were  to  demonstrate  the  utter  inadequacy 
of  these  rates.  That  State  is  probably  the  home 
of  the  famous  statesman  who  demanded  the  im- 
mediate repeal  of  the  law  of  supply  and  demand, 
because  it  interfered  with  his  political  prejudice 
and  arguments. 

It  remained  for  North  Carolina  to  do  better. 
Its  legislature  prohibited  any  company  from 
charging  higher  rates  on  farm  property  than  was 
at  that  time  charged  upon  farm  property  in  Vir- 
ginia. We  talk  of  the  ignorance  of  by-gone  days 
and  yet  it  is  still  with  us. 

The  State  of  New  York  has  some  queer  modi- 
fications of  the  retaliatory  statutes  adopted  in 
many  States.  In  addition  to  the  usual  require- 
ments of  similar  taxes,  etc.,  of  companies  of  such 
States,  the  superintendent  of  insurance  of  that 
State  is  required  to  forthwith  cancel  and  refuse 
to  license  all  insurance  companies  organized  under 
foreign  governments  where  such  foreign  govern- 
ment refuses  to  admit  New  York  life  companies, 
duly  furnished  with  a  certificate  from  the  superin- 
tendent of  insurance  of  that  State,  setting  forth 
their  solvency  and  good  management.     The  ori- 


877 

gin  of  this  statute  was  the  action  of  some  Euro- 
pean countries  in  refusing  American  life  com- 
panies the  right  to  do  business  in  their  domain, 
because  the  New  York  companies  did  not  comply 
with  the  laws  of  the  European  countries.  In  order 
to  fight  the  battles  of  the  life  companies  of  New 
York,  the  tire  companies  were  made  to  suffer.  If 
all  foreign  companies  were  driven  out  of  this 
country,  would  it  not  tend  to  raise  the  rate  of 
insurance  ? 

The  State  of  Washington,  prior  to  1897,  pro- 
vided that  in  the  event  of  the  total  destruction 
of  any  insured  building,  where  the  amount  of 
the  loss  was  found  to  be  less  than  the  amount 
in  the  policy,  the  company  was  obliged  to  return 
the  unearned  premium  for  the  excess  of  insurance 
over  the  appraised  or  agreed  loss.  Under  this 
statute,  the  insured  received  the  total  amount  of 
his  loss  and  also  a  return  of  unearned  premium. 
In  1897,  the  legislature  of  that  State  took  a  step 
backwards  and  followed  in  the  steps  of  other 
valued  policy  States,  providing  that  where  the 
building  was  wholly  destroyed  the  amount  of  the 
insurance  written  was  conclusive  of  the  true  value. 

In  1897,  the  Legislature  of  Wisconsin  passed  the 
following  statute : 

"The  directors  of  a  mutual  corporation  shall  be 
personally  liable  for  all  premiums  due  and  levied 


878 

on  policies  written  upon  risks  in  any  other  State  or 
foreign  country  in  which  the  corporation  has  not 
been  duly  and  legally  admitted  and  licensed,  and 
wherein  such  policies  have  been  written  in  viola- 
tion of  the  laws  of  any  such  other  State  or  foreign 
country." 

The  object  of  this  statute,  of  course,  was  to 
provide  that  all  policy-holders  in  any  mutual 
company  organized  in  Wisconsin  might  be  com- 
pelled to  pay  their  just  proportion  of  losses ;  and 
if,  on  account  of  the  company's  doing  business 
unauthorized  in  a  neighboring  State  the  company 
should  be  unable  to  collect  the  assessments,  the 
officers  should  be  liable  personally.  The  statute 
is  right,  except  that  in  another  part  is  found  the 
proviso  that :  "This  act  shall  not  apply  to  church 
mutual  insurance  companies  or  societies."  The 
effect  of  this  proviso  is,  that  officers  of  church 
mutual  societies  may  violate  the  laws  of  other 
States  with  impunity.  We  wait  for  a  learned 
disquisition  from  some  theologian  as  to  whether 
or  not  any  moral  guilt  is  involved  in  such  a 
practice ! 

In  the  State  of  Florida  there  is  a  statute  pro- 
viding for  certain  parties  to  obtain  license  and  pay 
fees  therefor,  in  order  to  engage  in  certain  classes 
of  business  in  that  State.  Peddlers,  lightning-rod 
dealers  and  insurance  agents  are  classed  together. 


879 

Was  this  classification  made  from  the  fact  that 
most  insurance  companies  issue  policies  with  a 
lightning  clause  attached  ? 

The  legislature  of  the  State  of  Michigan  evi- 
dently were  at  one  time  in  a  humorous  mood  and 
perpetrated  a  joke.  The  statute  of  that  State  pro- 
vides, that  where  an  insurance  company  has  been 
placed  in  the  hands  of  a  receiver,  that  ''if,  after 
paying  the  losses  and  liabilities  of  such  company 
and  the  services  and  expenses  (of  the  receivers) 
aforesaid,  there  shall  remain  any  funds  in  the 
hands  of  the  receivers,  the  same  shall  be  paid 
back,"  etc.  The  provision  is  all  right  in  theory, 
but  who  ever  heard  of  anything  being  paid  back 
after  the  receiver  and  the  policy-holders  were 
through  with  the  assets  of  a  defunct  insurance 
company  ? 

Another  instance  of  legislative  wisdom  in  the 
same  State  is  found  in  the  statute  organizing 
mutual  fire  insurance  companies.  The  statute 
prohibits  waiver  of  any  of  the  conditions  of  the 
policy,  except  in  writing,  and  provides  that  all  the 
conditions,  etc.,  of  the  policy  are  of  the  substance 
of  the  contract,  and  to  be  strictly  construed  in  its 
favor.  Search  among  the  statutes  controlling 
stock  companies  fails  to  find  any  such  provision. 
In  the  one  case  the  local  policy-holder  is  the  suf- 
ferer, in  the  other  case  it  is  supposed  to  be  the  in- 


880 


nocent  stockholder  who  resides  in  another  juris- 
diction. 

By  a  statute  of  1897,  the  legislature  of  Alabama 
prohibited  tariff  combinations  and  all  tariff  asso- 
ciations, etc.,  from  fixing  rates.  If  the  company 
"  belonged  to,  or  was  a  member  of,  or  in  any  way, 
(legal  or  otherwise)  connected  with  any  tariff  as- 
sociation or  such  like  thing,  by  whatever  name 
called,  either  in  or  out  of  this  State,"  etc.,  then 
the  assured  in  case  of  loss  can  recover  twenty-five 
per  cent,  additional.  Under  this  statute  it  is 
doubtful  whether  the  officers  of  two  companies 
could  even  meet  to  compare  their  experience  in 
different  branches  of  underwriting,  without  run- 
ning a  risk  of  being  compelled  to  convince  a  jury 
that  there  was  no  tariff  association  to  which  the 
defendant  belonged.  From  testimony  just  stated, 
there  is  little  doubt  as  to  what  the  verdict  of  a 
jury  would  be,  where  an  insurance  company  is  a 
defendant. 

The  statutes  of  Alabama  contain  another  very 
queer  provision.  In  the  statute  in  regard  to  ex- 
aminations of  companies,  there  is  an  innocent  pro- 
viso that,  *'in  the  case  of  the  foreign  life  insur- 
ance companies  for  the  purpose  of  this  act,  the  in- 
surance commissioner  shall  accept  as  true  and  cor- 
rect the  sworn  published  statement,"  etc.  Noth- 
ing is  said  of  fire  insurance  companies,  from  which 


881 

it  is  a  fair  inference  that  the  officers  of  lire  insur- 
ance companies  are  not  to  be  believed  even  under 
oath.  The  law  excepts  all  fire  insurance  com- 
panies, insuring  cotton  manufacturers  exclusively, 
from  the  operation  of  the  insurance  statutes.  Some 
one  must  have  had  a  ''  pull"  with  the  legislature 
of  Alabama. 

IN'ebraska  provides,  that  in  case  a  party  is  suc- 
cessful in  obtaining  judgment  against  a  fire  insur- 
ance company,  the  court  shall,  in  its  discretion, 
allow  the  plaintiff  to  recover  a  reasonable  attorney 
fee.  This  provision  is  applicable  only  to  j&re  insur- 
ance companies.  We  commend  to  the  people  of 
Nebraska  Section  9  of  the  Bill  of  Rights  con- 
tained in  the  Constitution  of  the  State  of  Wis- 
consin, which  reads  as  follows  : 

"Every  person  is  entitled  to  a  certain  remedy 
in  the  laws  for  all  injuries  or  wrongs  which  he  may 
receive  in  his  person,  property  or  character ;  he 
ought  to  obtain  justice  freely,  and  without  being 
obliged  to  purchase  it,  completely  and  without 
denial,  promj)tly  and  without  delay,  conformably 
to  the  laws." 

The  treatment  accorded  by  Nebraska  to  fire  in- 
surance corporations  is  justifiable  solely  upon  the 
old  doctrine  that  the  negro  had  no  rights  which 
the  white  man  was  bound  to  respect. 

The   State  of  Kansas,  like  its  sister  State  Ne- 


882 

braska,  allows  the  plaintiff  to  recover  of  a  fire 
insurance  company  a  reasonable  attorney  fee.  As 
all  expenses  and  disbursements  of  an  insurance 
company  are  collected  from  the  policy -holders  by 
means  of  increased  premiums,  it  is  easy  to  see  who 
pays  the  freight. 

Oklahoma  has  a  valued  policy  law  that  is  unique, 
and  we  are  not  certain  but  its  adoption  in  other 
States  would  be  a  good  compromise.  The  statute 
provides  that  the  company  shall  ''pay,  in  case  of 
total  loss,  the  full  amount  of  the  policy."  A 
neighboring  section  provides  that  ''no  policy  shall 
be  issued  for  more  than  twenty-five  per  cent,  of  the 
value  of  the  property."  If  this  latter  section  is  a 
modification  of  the  valued  policy  law,  it  is  a  good 
one.  If,  on  the  other  hand,  it  be  construed  as 
simply  directory  to  tire  insurance  companies,  then 
it  is  a  complete  admission  that  a  valued  policy  law 
is  wrong  in  principle. 

The  legislature  of  Minnesota  is  evidently  op- 
posed to  exploiters  of  mutual  fire  insurance  com- 
panies. Its  legislation  is  certainly  intended  to 
discourage  that  industry.  It  requires  every  policy 
issued  by  a  mutual  fire  insurance  company  to  state 
upon  its  face  the  limit  of  liability  of  the  assured 
Tinder  the  policy. 

The  State  of  Maryland  requires  every  insurance 
company  to  publish  its  annual  statement  three 


883 

times  in  each  county  in  which  it  does  business  in 
at  least  one  newspaper,  except  mutual  companies 
organized  under  the  laws  of  that  State.  The  irony 
of  the  section  is  in  leaving  it  optional  with  the 
insurance  companies  whether  they  will  publish  in 
more  than  one  newspaper  in  each  county.  The 
laudable  object  of  this  legislation  was  to  compel 
the  stock  insurance  companies  doing  business  in 
Maryland  to  contribute  to  the  support  of  a  "free 
press ' '  in  that  State  for  the  enlightenment  of  the 
people.  They  need  it.  It  is  to  be  noted  that  if 
mutual  companies  organized  under  the  laws  of 
Maryland  were  to  pay  these  fees,  it  must  be 
charged  back  to  the  policy-holders  in  that  State  ; 
but  in  stock  companies  it  was  probably  supposed 
that  the  shareholders  must  pay  this  additional 
burden. 

In  spite  of  the  almost  universal  practice  through- 
out this  country,  the  State  of  Vermont  prohibits  a 
provision  for  appraisement  of  the  amount  of  the 
loss  as  a  condition  precedent  in  its  policies.  Min- 
nesota, Wisconsin,  and  many  other  States,  as  well 
as  the  provinces  of  Canada,  recognize  the  validity 
and  usefulness  of  this  provision,  by  enacting  that 
in  case  the  two  appraisers  mutually  chosen  fail  to 
agree  upon  an  umpire,  an  appeal  may  be  made  to 
the  presiding  judge  of  some  adjacent  court  to  se- 
lect the  umpire. 


884 

A  number  of  the  States  have  provided  that  where 
parties  act  as  agents  for  an  unauthorized  company, 
they  shall  be  liable  for  any  loss  occurring,  which 
their  principal  company  refuses  or  neglects  to  pay. 
In  other  States  there  is  a  fine  or  penalty.  The  for- 
mer legislation  is  the  better,  because  it  gives  relief 
to  the  party  injured ;  while  in  the  latter  case  it 
leaves  the  individual  remediless,  and  the  State 
profits  from  the  violation  of  its  own  laws. 

Ohio,  Wisconsin  and  many  of  the  States  make  it 
a  criminal  offense  to  defraud  life  or  accident  insur- 
ance companies  in  any  way.  Silence  in  regard  to 
like  frauds  upon  fire  insurance  companies  speaks 
louder  than  words  the  well-known  fact  that  a  great 
many  men  deem  it  at  least  legitimate  to  pad  proofs 
of  loss  and  secure  illegal  profit  from  insurance  com- 
panies. 

The  legislature  of  Mississippi,  by  enacting  that 
no  company  or  its  officers  shall  make  a  charge  of 
extra  premium  or  increased  rates,  on  account  of  the 
valued  policy  law,  would  probably  protest  when 
presented  at  the  ordinary  hotel  with  a  bill  of  ex- 
tras for  canvas-back  duck  and  champagne.  Another 
statute  of  that  State,  in  the  mind  of  the  writer,  is 
utterly  indefensible.  It  requires  every  agent  to 
file  in  the  required  public  office  a  list  of  all  poli- 
cies, names,  descriptions  of  property,  rates,  terms 
of  expiration,  etc.    The  only  practical  benefit  to  be 


885 

gained  from  this  is  to  give  rival  agents  complete 
knowledge  of  business  not  their  own. 

The  State  of  Georgia  requires  all  foreign  compan- 
ies organized  outside  of  that  State  to  deposit  with 
the  State  treasurer  twenty-five  thousand  dollars  in 
U.  S.  bonds,  or  in  such  Georgia  bonds  as  the  legis- 
lature of  that  State  shall  declare  valid.  Why 
should  any  State  have  bonds  that  require  a  legis- 
lative enactment  to  declare  their  validity  ?  If  they 
are  bonds  of  the  State,  they  are  valid  ;  if  they  are 
not  bonds  of  the  State,  they  are  pieces  of  waste 
paper.  Georgia  is  one  of  the  States  that  has  the 
valued  policy  law  applicable  to  both  real  and  per- 
sonal property.  There  may  possibly  be  some  ex- 
cuse or  justification,  under  some  circumstances, 
for  a  valued  policy  upon  real  property ;  but  a 
policy  upon  personal  property,  like  a  stock  of  goods 
in  a  store,  which  is  fiuctuating,  is  certainly  not  open 
to  argument.  It  is  only  what  is  to  be  expected 
from  a  legislature  that  will  enact  a  statute  substan- 
tially as  follows : 

"Any  citizen  of  this  State  may  cite  any  com- 
pany, duly  authorized  to  do  business,  to  show 
cause  before  the  commissioner  of  insurance  why 
its  license  is  not  revoked,  if  any  rate  be  increased, 
or  if  the  company  refuse  to  insure  property  at  a 
reasonable  rate." 

This  provision  gives  the  insurance  commissioner, 


886 

oftentimes  a  mere  political  appointee  with  no  ex- 
perience in  underwriting  whatever,  the  duties  of 
an  expert  underwriter,  where  his  every  interest  is 
against  the  company.  With  all  due  deference  to 
the  legislature  of  the  State  of  Georgia,  we  do  not 
think  that  a  single  resident  of  that  State  has  the 
qualifications  to  fix  a  fair  and  equitable  rate  upon 
all  the  property  of  that  State,  if  he  had  no  other 
duty  to  perform.  If  there  is  such  an  one,  any  com- 
pany will  be  glad  to  employ  him  at  once  and 
double  his  salary.  A  statute  in  Indiana,  if  not 
repealed,  requires  that,  in  case  of  notice  of  any 
loss  being  received  by  an  agent  who  issued  the 
policy,  he  shall  retain  all  money  on  hand  at  the 
time  and  afterwards  received,  until  the  loss  is 
paid.  In  case  of  suit,  he  may  deposit  twice  the 
amount  in  court,  and  thereby  release  the  balance. 
The  plaintiff  can  also  notify  other  agents,  and 
compel  them  to  retain  funds  in  their  possession. 
The  result  of  this  statute  is  to  compel  payment 
and  avoid  strict  investigation  as  to  the  character 
and  amount  of  the  loss.  The  company  cannot 
obtain  interest  upon  its  funds  so  sequestered,  and 
must,  at  the  same  time  take  the  chances  of  an 
agent's  defalcation.  The  statutes  of  the  same 
State  prohibit  co-insurance  clauses,  except  for 
railroad  and  marine  risks.  By  this  latter  act  the 
legislature  of  Indiana  admitted  the  justice  and 


887 

wisdom  of  a  co-insurance  clause,  but  limited  its 
benefits  to  large  corporations. 

The  State  of  Delaware  requires  an  annual  tax 
of  one  hundred  dollars  per  annum,  but  excepts  the 
Delaware  State  Grange  Fire  Insurance  Company. 
Provisions  similar  to  this  are  scattered  through 
the  statute  books  of  other  States.  It  is  simply  a 
perpetual  reminder  that  the  men  who  compose 
these  legislative  bodies  are  exceedingly  human, 
and  prone  always  to  help  their  friends  at  the  ex- 
pense of  equal  justice  to  all. 

The  legislature  of  that  State  has  tried  to  modify 
the  valued  policy  law  by  providing,  ''  it  shall  be  in 
force"  unless  the  fire  be  caused  by  the  criminal 
fault  of  the  insured.  In  other  words,  when  the 
criminal  proclaims  in  advance  that  he  intends  to 
burn  his  property  and  gives  the  company  notice  so 
they  may  obtain  proof,  then  the  valued  policy  law 
shall  not  be  in  force. 

The  writer  would  commend  to  the  student  of 
legislation  upon  fire  insurance  the  statutes  of  the 
Dominion,  and  several  provinces  of  Canada.  No 
State  in  the  Union  can  exhibit  a  statute  book 
showing  the  learning  and  comprehension  of  busi- 
ness, the  broadness  with  which  companies  are 
treated,  and  at  the  same  time  the  strict  account- 
ability to  which  they  are  held  to  the  faithful  per- 
formance of  every  obligation  they  may  make.    The 


888 

greatest  freedom  of  contract  is  given  to  the  com- 
panies, in  order  to  enable  them  to  meet  all  the 
exigencies  of  modern  business  life  with  its  chang- 
ing conditions.  Yet  at  the  same  time  they  compel 
'the  companies  to  so  preserve  their  capital  and  sur- 
plus as  to  be  ready  at  all  times  faithfully  to  f uljfill 
their  obligations.  Upon  the  much  talked  of  ques- 
tion of  valued  policy  laws  there  certainly  is  no 
better  rebuke  than  the  following  provision  taken 
'from  the  enactments  of  the  province  of  Ontario, 
to  wit : 

"  The  sum  insured  does  not  constitute  any  proof 
of  the  value  of  the  object  of  insurance  ;  such  value 
must  be  established  in  the  manner  required  by  the 
conditions  of  the  policy  and  the  general  rules  of 
proof  unless  specially  valued." 

This  enactment  reads  like  one  of  the  rules  of  the 
old  English  common  law,  which  is  supposed  to  be 
the  embodiment  of  common  sense  gathered  from 
the  experience  of  many  men  in  many  ages. 

Believing  that  most  of  the  legislation  mentioned 
is  due  to  want  of  proper  knowledge  of  the  subject, 
let  us  hope  that  the  next  generation  may  be  wiser 
than  this.  Legislation  to  limit  and  control  con- 
tracts as  well  as  religion  has  always  proven  a 
failure.  When  men  understand  that  the  rules  of 
law  are  but  the  rules  of  true  and  enlightened  busi- 
ness, we  may  look  for  wise  legislation. 


HOW  TO  EXAMINE  A  FIRE  INSURANCE 
COMPANY. 


J.  J.  BRINKERHOFF : 


A  FIRE  insurance  company  is  a  corporation,  ex- 
-^^  isting  by  authority  of  a  State  or  government 
conferred  through  a  specially  enacted  charter,  or 
acquired  by  compliance  with  the  requirements  and 
conditions  prescribed  by  general  statute.  It  is, 
therefore,  subject  to  the  law  of  its  creation. 

The  purpose  for  which  it  was  created  and  for 
which  it  exists,  is  to  furnish  to  the  people  contracts 
of  indemnity  against  loss,  for  valuable  considera- 
tion. It  is,  therefore,  under  obligation  to  the  State,  ^ 
its  creator,  and  to  the  people,  its  patrons,  to  main- 
tain itself  in  a  condition  of  ability  to  carry  out  its 
tjontracts. 

It  is  composed  of  its  stockholders  or  members 
ivho  are  officially  responsible  for  its  acts,  and 
whose  interests  are  vitally  affected  by  its  condition 


890 

and  the  management  of  its  affairs,  by  their  chosen 
agents. 

An  examiner,  appointed  by  the  proper  State  au- 
thority and  to  that  extent  representing  the  visitorial 
power  of  the  State,  should  have  constantly  in  mind, 
in  performing  his  work,  the  obligations  and  duties 
growing  out  of  these  relationships,  and  consider 
the  affairs  and  transactions  of  the  company  from 
the  standpoint  of  each. 

The  proposition  that  the  affairs  and  transactions 
of  a  company  should  be  considered  by  an  examiner 
in  their  relation  to  stockholders,  either  as  giving 
them  undue  benefit,  or  as  working  to  their  injury, 
will  doubtless  be  disputed  by  some.  It  will  not  be 
here  insisted  upon  as  a  separate  proposition  or  as  a 
necessary  line  of  independent  inquiry.  It  will  be 
conceded  that  stockholders  are  generally  able  to 
take  care  of  themselves,  and  that  in  most  cases  if 
any  undue  advantage  has  been  given  them  it  will 
be  viewed  as  an  injury  to  policy-holders.  It  is 
pertinent,  however,  to  observe  that  stockholders  of 
companies  constitute  a  large  and  respectable  por- 
tion of  the  citizens  of  a  State,  and  entitled  to  its 
protection  ;  that  they  have  made  large  investments 
in  the  stocks  of  companies  which  the  State  has  un- 
dertaken to  supervise  and  examine  ;  that  many  of 
them  have  no  more  accurate  knowledge  of  the  con- 
dition and  affairs  of  their  own  company,  than  the 


891 

public  has  which  obtains  its  information  from  pub- 
lished reports  and  examinations  ;  that  as  the  State 
has  assumed  to  regulate  and  supervise  these  insti- 
tutions it  is  considered  that  its  endorsement  is  a 
guarantee  of  security  and  that  what  it  has  not  con- 
demned is  proper.  It  should  be  considered  also 
that  an  injury  to  the  stockholders  does  not  always 
add  to  the  benefit  or  security  of  the  policy-holders 
The  limits  of  the  rights  of  stockholders  as  well  as  any 
injury  to  which  their  interests  may  be  subjected 
are  not  improper  subjects  for  consideration  in  an 
examination. 

The  charter  of  a  company  and  the  laws  of  the 
State  in  which  it  is  incorporated  impose  upon  it 
limitations,  and  contain  regulating  provisions, 
which  it  is  essential  for  an  examiner  to  be  familiar 
with  before  he  is  qualified  to  make  an  intelligent 
examination  of  its  condition  and  affairs  on  behalf 
of  a  State.  The  restless  and  energetic  spirit  of  the 
age  has  so  diversified  old  business  activities  and 
called  into  existence  such  a  variety  of  new  ones, 
each  requiring  the  protection  which  is  afforded  by 
Insurance  Companies,  that  new  kinds ^and  forms  of 
indemnity  are  constantly  called  for.  Managers  of 
companies  with  equal  enterprise  and  energy  are 
prompt  to  meet  the  demand.  The  authority  to  do 
this  is  sometimes  based  upon  a  construction  arrived 
at  from  a  favorable  standpoint.    A  situation  of  this 


892 

character  is  not  so  frequently  met  with  in  the  case 
of  fire  insurance  companies  as  in  insurance  com- 
panies of  other  character.  Nevertheless  there  are 
instances  known  to  history  where  an  examiner  of  a 
fire  insurance  company  had  need  to  take  notice  of 
and  submit  for  consideration  matter  of  this  charac- 
ter. Furthermore,  it  is  necessary  for  him  to  see 
that  the  business  has  been  carried  on  and  its  affairs 
managed  in  harmony  with  enacted  provisions  and 
restrictions.  His  inquiry  should  be  directed  to 
those  matters  which  are  commonly  regulated  by 
the  laws  of  most  of  the  States,  as  the  payment  of 
dividends  to  stockholders,  the  manner  of  acquiring 
and  the  tenure  of  real  estate,  the  amount  of  insur- 
ance carried  on  a  single  risk,  and  such  other  mat- 
ters of  similar  character  as  may  appertain  tq  the 
particular  case.  In  some  cases  it  may  be  remarked 
that  his  efforts  would  be  put  forth  in  a  laudable 
and  fruitful  undertaking,  and  one  subserving  the 
public  interest  if  he  should  endeavor  to  ascertain 
whether  the  company  has  been  violating  the  laws 
of  any  State  by  carrying  on  therein  the  business 
known  as  underground  insurance,  a  business  for 
which  it  was  not  incorporated.  As  a  failure  to 
conform  to  the  provisions  of  law,  a  violation  of  its 
positive  requirements,  or  acts,  which  are  ultra 
vires,  may  bring  consequences  of  serious  injury 
upon  a  company,  it  is  the  duty  of  the  examiner  to 


893 

project  his  lines  of  inquiry  in  these  directions, 
and  an  intelligent  undertaking  of  this  character  re- 
quires a  knowledge  of  the  requirements  of  the  law 
and  the  terms  of  the  charter  of  the  company. 

It  is  a  uniform  principle  in  the  statutes  of  the 
several   States,    to  condition  the   exercise   of  the 
franchise  of  an  insurance  company  within  their 
respective  limits  upon  the  solvency  of  the  company, 
and  consequently  the  chief  object  of  an  examination 
is  to  determine  the  financial  solvency  of  the  com- 
pany's affairs,  according  to  the  tests  established  by 
law.     Necessarily  the  items  primarily  subject  to 
inquiry  for  this  purpose    group  themselves  into 
two  classifications,  namely — assets  and  liabilities. 
What  does  the  company  possess  or  claim,  and  what 
is  its  value — what  does  it  owe  or  may  be  liable  for  ? 
and  the  inquiry   concerning  each  class  is  twofold 
— simple,  but    comprehensive.     As    to  assets  the 
question  is  as  to  ownership  or  title,  and  value — as 
to  liabilities,  the  question  is  as  to  accuracy  and 
completeness.     Let  us  not  permit  the  simplicity  of 
these  propositions  to   obscure  their  importance  or 
value.     They  are  characterized  by  simplicity,  but 
it  is  the  simplicity  and  plainness  which  belong  to 
fundamental    principles.     They    are  the  essential 
inquiries  to  be  constantly  borne  in  mind  and  an- 
swered in  every  examination  and  upon  the  com- 
pleteness with  which  they  are  answered  depend  the 


894 


character  and  value  of  the  examination.  Too  many 
examinations  have  proved  valueless  because  one  or 
another  of  these  questions  was  lost  sight  of.  There 
is  no  need  of  argument  to  prove  that  it  is  not 
sufficient  to  show  that  a  company  is  in  possession 
of  certain  assets  or  securities  unless  it  is  con- 
clusively proven  to  be  in  rightful  possession  of  them 
through  bona  fide  ownership,  and  the  actual  value 
of  them  is  ascertained,  nor  is  it  sufficient  to  ascer- 
tain that  the  company  is  chargeable  with  cer- 
tain items  of  admitted  liabilities,  without  proving 
that  such  items  of  liabilities  are  correctly  computed 
and  that  there  are  no  other  liabilities  with  which 
it  is  chargeable.  It  may,  therefore,  be  stated  as  a 
fundamental  proposition  that  in  every  properly 
conducted  examination  the  examiner  must  deter- 
mine the  ownership  and  value  of  the  assets  of  the 
company  and  must  ascertain  and  compute  accur- 
ately its  complete  liabilities. 

It  is  however,  easier  to  state  this  proposition 
than  it  is  to  apply  it  in  respect  to  a  number  of  the 
items  entering  into  the  statement  of  condition  of  a 
company. 

In  the  examination  of  a  company  which  has  been 
but  recently  organized,  not  only  should  the  securi- 
ties or  assets  representing  the  investment  of  its 
original  capital  be  subjected  to  special  and  strict 
scrutiny  in  these  regards,  but  the  manner  in  which 


895 

its  subscribed  capital  stock  has  been  paid  should 
be  a  point  of  special  inquiry.     The  laws  of  most  of 
the  States,  if  not  all,  require  that  the  capital  stock 
subscribed  shall  be  paid  for  in  cash  or  in  money, 
and  the  funds  thus  derived,  invested  in  certain 
enumerated  kinds  of  securities.     The  payment  of 
the  money  to  the  company  for  the  stock  issued, 
and  the  investment  of  the  money  received  by  it  for 
such  stock,  are  made  by  the  statutes  two  separate 
and  independent  transactions.      In  the  first  the 
company  sells  its  stock  and  dictates  the  price  ;  in 
the  second,  it  lends  the  money  and  dictates  the  se- 
curity, or  invests  it  and  chooses  the  kind  of  invest- 
ment.    In  both  of  these  transactions  it  is  in  a  posi- 
tion to  dictate  the  terms.     This  is  the  method  of 
organization  prescribed  by  the  laws  of  most  of  the 
States.     Sometimes,  however,  by  a  convenient  con- 
struction the  incorporators  are  permitted  to  com- 
bine the  two  transactions  in  one,  and  put  up  se- 
curities in  consideration  of  stock  issued,  upon  the 
theory  that,  although  the  law  requires  the  organi- 
zation to  be  effected  in  a  prescribed  way,  neverthe- 
less, some  other  way,  which  is  considered  just  as 
good,  will  answer  just  as  well.     Whatever  plausi- 
ble argument  may  be  advanced  in  support  of  this 
theory,  a  stronger   argument   against  it  is  to  be 
found  in  the  history  of  companies  exploited  in  this 
manner.     Instances  of   the  early  demise  of  com- 


panies  from  such  defects  of  organization  are  known 
to  all  and  need  not  be  mentioned.  An  examiner 
should  view  with  strong  suspicion  any  organization 
of  a  company  effected  in  this  manner,  and  if  the 
established  fact  that  the  stock  was  thus  traded  is 
not  deemed  sufficient  to  determine  its  exclusion 
from  business  in  his  State,  he  should  conclusively 
determine  by  thorough  investigation — First, 
whether  there  was  not  collusion  or  corrupt  mutual 
agreement  between  the  stockholders  to  foist  on  the 
company  their  securities  at  fictitious  values — 
Secondly,  whether  there  was  not  a  lack  of  faith  in 
the  success  of  the  enterprise  and  a  string  retained 
by  the  stockholders  to  their  securities — Thirdly, 
whether  the  stockholders  were  not  lacking  in 
financial  ability  and  put  up  their  obligation  upon 
an  agreement  that  dividends  should  cancel  interest. 
This  deviation  from  the  method  prescribed  by  law, 
warrants  one  or  another  of  these  suspicions,  and  is 
sufficient  to  destroy  confidence  in  the  company. 

An  examination  of  a  company  may  be  made  for 
the  purpose  of  verifying  or  proving  the  correctness 
of  its  annual  statement  of  condition  rendered  the 
department,  or  it  may  be  made  to  ascertain  its 
condition  at  a  subsequent  date,  in  either  case  the 
examiner  should  have  at  hand  for  inspection  and 
reference,  correct  copies  of  the  official  annual  state- 
ments of  the  officers  for  several  preceding  years. 


897 

Unless  the  condition  of  the  company  is  such  as  to 
preclude  its  further  continuance  in  business,  the 
result  of  the  examination  will  necessarily  be  com- 
pared with  the  showing  in  the  company's  own 
statements  of  condition  at  previous  dates.  Such 
comparison  will  furnish  the  examiner  in  many 
cases  valuable  information  and  the  statements 
themselves  will  be  suggestive  to  him  in  many  im- 
portant particulars. 

It  is  a  good  plan  to  begin  an  examination  by 
actual  count  of  cash  in  office  at  the  entrance  of  the 
examiner,  verifying  the  same  with  the  balance 
called  for  by  the  books  of  the  company  at  that 
time  and  adjusting  it  through  proper  checking  of 
receipts  and  disbursements  to  prove  the  balance  at 
the  date  at  which  the  condition  is  to  be  ascer- 
tained. 

Cash  in  office,  as  reported  in  annual  statements 
is  not  always  or  in  all  companies  what  it  seems  to 
be.  Occasionally  it  includes  some  items  which  are 
in  no  sense  cash,  and  others  which  are  in  fact  dis- 
bursements not  charged  up.  In  some  companies 
it  is  frequently  difficult  to  ascertain  at  a  subse- 
quent date  the  true  character  of  this  item.  Im- 
portant information  or  suggestions  as  to  the  nature 
and  value  of  this  item  of  assets  at  a  previous  date 
may  often  be  obtained  by  ascertaining  its  character 
at  an  unexpected  date. 


A  convenient  and  natural  advance  in  the  work 
from  this  point  is  made  by  checking  and  verifying 
a  trial  balance  of  its  ledger  accounts,  thus  proving 
its    books  to    be  in    balance.     Furthermore,   the 
examiner,  by  giving  a  little  studious  attention  to 
this    preliminary    vrork,    by    tracing    to    original 
sources  such  items  as  are  suggestive  of  special  in- 
quiry, and  by  investigating  the  structure  and  jcom- 
position  of  such  accounts  as  are  of  uncertain  char- 
•acter,  will  qualify  himself  for  more  intelligently 
formulating  his  plan  of  examination,  and  acquire 
^t  the  outset  a  valuable  general  understanding  of 
"the   company's  system  of  accounts  and  in  many 
»cases  be  able  to  detect  any  peculiarities  in  them 
which  will  require   his  special  attention.     AYith 
this  general  information  in  his  possession  he  should 
undertake  to  further  familiarize  himself  with  the 
company's  system  and  office  methods  in  each  de- 
partment of  its  work — as  the  bookkeeping  depart- 
ment, the  agency  department,  the  policy  and  risk 
department,  the  claims  dejoartment,  and  any  other 
department  embraced  in  the  division  of  its  busi- 
ness, in  respect  to  each  obtaining  as  complete  and 
accurate  knowledge  as  possible  of  the  details  of  its 
methods  and  the  relation  and  correspondence  of 
each  with  the  other,  under  its  own  peculiar  system. 
Notwithstanding  the  fact  that  the  business  of  com- 
panies, and  the  general  results  to  be  preserved  are 


899 

similar  in  cliaracter,  the  details  leading  up  to  such 
results  may  be  and  frequently  are  very  dissimilar 
as  between  different  companies,  and  the  examiner 
should  have  in  mind  at  all  times  the  details  and 
special  features  in  the  system  of  the  company 
under  examination. 

It  is  not  practicable  in  this  paper,  nor  is  it 
deemed  necessary  to  follow  out  and  enumerate 
what  might  be  termed  the  mechanical  details  of 
this  part  of  the  work  of  the  examiner.  Anyone 
competent  to  make  an  examination  keeping  in 
mind  the  general  principles  and  purposes  before 
referred  to,  and  having  familiarized  himself  with 
the  system  and  plans  of  the  company  will  be  able 
to  work  out  the  details  of  the  examination  of  the 
books  and  accounts  without  difficulty. 

What  has  already  been  said  implies  the  necessity 
of  a  careful  count  and  inspection  of  such  items  of 
ledger  assets  as  loans  on  mortgages,  loans  on  col- 
laterals, stocks  and  bonds  owned,  and  the  title 
deeds  of  real  estate  owned — ^the  valuation  of  these 
assets,  and  the  verification  of  the  actual  purchase 
or  proper  acquisition  of  the  same.  IN'othing  addi- 
tional need  be  said  concerning  them,  except  that 
the  receipt  of  interest,  dividends  and  rent,  should 
be  traced  to  determine  their  character  as  income- 
producing  assets  and  ii:iL  the  basis  for  computing 
due  and  accrued  interest  and  rent.      The  amount 


900 

claimed  as  casli  in  bank  should  be  verified  by  cer- 
tificate of  the  cashier  of  the  bank  and  the  balance 
shown  on  the  company' s  pass  book  after  correcting 
the  same  for  checks  issued  and  unpaid.  It  is  im- 
portant to  determine  whether  this  balance  includes 
borrowed  money  or  fictitious  credit.  It  is  possible 
to  measurably  conceal  such  items  on  the  company's 
books.  As  an  instance,  one  company  discovered 
agents'  accounts  to  be  a  convenient  place  for  such 
concealment,  and  credited  borrowed  money  to  bal- 
ance old  worthless  agents'  debits.  This  answered 
the  purpose  for  making  an  annual  statement  but 
did  not  stand  the  test  of  an  examination.  By  ob- 
serving the  uniformity  of  the  deposits  and  their 
correspondence  with  the  receii)ts  of  the  company  in 
its  business,  the  examiner  will  generally  be  able  to 
determine  their  source. 

The  credit  to  be  given  to  the  company  for  pre- 
miums not  yet  received  by  it  on  policies  in  force, 
whether  standing  on  the  books  as  agents'  balances 
or  appearing  as  premiums  due  and  unpaid  is  an  im- 
portant item  for  the  consideration  of  the  examiner. 
The  amount  and  character  of  this  item  should  be 
carefully  considered.  The  amount  should  be  con- 
sidered in  respect  to  the  proportion  it  bears  to  the 
total  assets  of  the  company,  to  the  volume  of 
business  transacted  by  the  company,  and  to 
the  amount  reported  in  previous  statements,  and 


901 

its  character  should  be  determined  by  the  ex- 
perience of  the  company  in  collecting  the  amount 
shown  in  previous  annual  statements  and  the  length 
of  time  during  which  the  balances  have  been  car- 
ried or  the  premiums  have  remained  unpaid.  The 
correctness  of  the  amount  of  balances  due  appear- 
ing on  the  general  ledger  or  agents'  ledger  should 
be  determined  by  proper  comparison  and  checking 
of  the  agents'  monthly  statements  and  the  daily  re- 
ports, at  least  to  a  sufficient  extent  to  establish  the 
accuracy  and  integrity  of  the  accounts.  It  should 
be  borne  in  mind  that,  owing  to  unevenness  of  dis- 
tribution of  business  written  throughout  the  year, 
the  amount  of  uncollected  premiums  may  be  much 
larger  at  certain  periods  than  the  general  average 
for  the  year  is.  This  fact  should  be  noted  in  any 
comparison  with  amounts  reported  at  previous 
dates.  Whether  the  item  is  disproportionately 
large  can  be  determined  by  comparison  with  other 
similar  companies,  with  the  averages  in  depart- 
mental reports,  and  by  inquiring  into  the  particur 
lar  causes  in  the  company  under  examination.  Of 
course,  the  examiner  must  determine  whether  these 
accounts  are  gross  or  net ;  that  is,  whether  or  not 
commissions  and  expenses  have  been  credited 
agents  on  all  business  charged  them.  If  such 
credits  have  not  been  given  them,  a  charge  in  lia- 
bilities therefor  will  be  required.     Agents'  debit 


•    902 

balances  and  agents'  credit  balances  should  be 
treated  as  separate  items  in  a  statement  of  condi- 
tion— the  first  as  an  asset  to  the  extent  its  charac- 
ter justifies,  and  the  second  as  an  actual  liability — 
even  though  they  are  both  merged  into  one  ac- 
count on  the  general  ledger.  It  is  not  practicable 
to  pay  what  is  due  one  agent  with  what  is  owing 
from  another  agent  without  first  collecting  the 
latter  account — consequently  the  value  of  one  as 
an  asset  is  to  be  determined,  and  the  other  to  be 
treated  as  a  liability.  As  regards  the  character  of 
this  kind  of  asset — the  convention's  blank  for  an- 
nual statement  excludes  from  assets  uncollected 
premiums  more  than  three  months  due,  and  ex- 
cludes bills  receivable  for  premiums  when  past 
due.  This,  of  course,  is  a  proper  rule  to  govern  in 
an  examination.  While  this  rule  of  the  exclusion 
of  premiums  more  than  three  months  due  accord- 
ing to  the  language  of  the  blank,  relates  only  to 
premiums  in  course  of  collection  as  distinct  from 
balances  due  from  agents,  nevertheless  the  exam- 
iner should  ascertain  whether  agents'  balances  are 
those  of  live  and  active  accounts  and  properly  se- 
cured by  bonds,  or  whether  they  are  old  and  worth- 
less accounts,  and  admit  or  exclude  them  accord- 
ingly. It  must  be  remembered  by  the  examiner 
that  the  exclusion  of  these  items  from  assets  ne- 
cessitates the  elimination  from  liabilities  of  such 


903 

amounts  as  were  charged  on  account  of  the  same  in 
unearned  premiums,  commissions  or  other  expenses.: 

Turning  now  to  the  liabilities  of  the  company, 
it  is  found  that  the  two  principal  items  requiring 
the  attention  of  the  examiner  are — unpaid  losses 
and  unearned  premiums. 

Concerning  unpaid  losses  it  is  essential  for  him 
to  determine  the  correctness  of  the  estimate  of  lia- 
bility for  unadjusted  losses  from  the  facts  in  the 
possession  of  the  company.  Whether  or  not  it  is 
the  practice  of  the  company  to  underestimate  its 
unpaid  losses,  and  to  what  extent  the  company' s^ 
own  estimate  can  be  relied  on,  can  be  determined 
by  ascertaining  the  amount  actually  paid  in  settle- 
ment of  previously  reported  unpaid  losses.  If  he 
finds  that  losses  have  been  actually  settled  at  less 
than  previous  estimates,  his  work  in  this  direction 
may  be  considerably  abridged.  Adjusted  losses 
present  no  serious  difiiculty  in  respect  to  the 
amount  of  liability  to  be  charged.  Neither  do 
losses  in  suit,  inasmuch  as  the  laws  of  the  various 
states  require  that  the  liabililies  shall  include  the 
amount  of  claims  for  losses  resisted  by  the  com- 
pany. Instances  will  occasionally  be  found  how- 
ever, where  an  improper  motive  for  bringing  suit 
is  so  apparent  as  to  justify  the  examiner  in  taking 
notice  of  it  and  according  special  treatment  to  the 
case. 


904 

It  is  frequently  difficult  for  the  examiner  to 
satisfy  himself  that  he  has  discovered  all  the  un- 
paid losses  of  the  company,  but  it  is  not  proposed 
to  here  undertake  to  furnish  him  a  safeguard 
against  deception  where  a  company  undertakes  to 
conceal  its  unpaid  loss  liability.  He  must  rely 
upon  his  own  ingenuity,  research,  experience  and 
knowledge  of  methods,  and  practices  for  his  pro- 
tection, in  such  case.  He  should  note  whether 
entry  is  made  on  the  loss  record  at  the  time  notice, 
however  informal,  is  received.  If  this  method  is 
strictly  adhered  to,  such  record,  after  checking 
losses  paid,  will  furnish  the  desired  information. 
If  entry  is  only  made  when  losses  are  adjusted,  or 
when  paid,  his  inquiry  should  extend  to  the  files 
and  correspondence  of  the  company,  the  disburse- 
ments for  expenses  of  suits,  and  the  cancelments 
for  loss.  The  happening  of  the  contingency  in- 
sured against  raises  a  presumption  of  liability,  and 
such  cases  as  the  company  has  notice  of  only, 
where  no  proofs  or  adjustments  have  yet  been 
made,  should  be  taken  account  of  by  the  examiner, 
and  a  proper  amount  therefor  charged  under  lia- 
bilities. 

The  unearned  premium  liability  is  a  factor  of 
prime  importance  in  the  statement  of  condition  of 
a  fire  insurance  company,  and  its  correct  computa- 
tion is  a  matter  of  especial  concern  to  an  examiner. 


905 

It  is  not  within  the  province  of  this  paper  to  dis- 
cuss the  theory  upon  which  this  fund  is  required, 
nor  the  functions  which  belong  to  it,  whether  it  be 
a  fund  to  provide  for  the  payment  of  expected 
losses  under  policies  in  force,  a  reserve  to  protect 
policy-holders  by  re-insurance  in  case  the  company 
should  decide  to  retire  from  business,  or  a  fund 
equivalent  to  the  amount  the  company  would  be 
required  to  return  to  its  policy-holders,  should  it 
decide  to  relieve  itself  of  all  liability  under  its 
policies  by  cancellation.  The  laws  of  Illinois,  and 
most  of  the  States,  require  the  premiums  unearned 
on  unexpired  risks  to  be  held  in  reserve  and 
charged  as  a  liability.  This  requirement,  as  a 
measure  of  liability,  is  in  accord  with  the  terms 
of  the  contracts  of  insurance,  which  obligate  the 
company  to  return  to  policy-holders  the  jpro  rata 
unearned  premium  in  case  it  elects  to  cancel  the 
policies.  If  inconsistencies  result^  by  reason  of 
differences  in  premiums,  and  unequal  reserves  are 
charged  on  risks  of  similar  character,  equal  hazard 
and  like  amounts,  written  in  different  States  or 
localities,  it  is  an  inconsistency  for  which  the  ex- 
aminer is  not  responsible,  and  with  which  he  need 
not  especially  concern  himself.  Nor  need  it 
worry  him  if  the  reserve  thus  computed  should  be 
found  to  be  in  excess  of  the  probable  future  losses 
on  outstanding  risks,  or  the  net  amount  required 


906 


to  re-insure  them.  But  it  is  not  so  clearly  a  matter 
of  unconcern  should  it  be  obviously  insufficient  to 
meet  such  losses  or  provide  such  re-insurance.  It  is 
true  that  current  receipts  as  well  as  funds  in  hand 
are  available  for  the  payment  of  future  losses,* 
but  it  should  not  be  necessary  to  draw  on 
future  receipts  to  pay  losses  occurring  under 
policies  included  in  the  reserve  account  of  a 
previous  date.  While  the  laws  require  that  pre- 
miums charged  shall  be  held  in  reserve  for  account 
of  unexpired  risks,  pro  rata  for  the  unexpired 
time  of  the  risks,  without  limitation  as  to  the 
adequacy  of  the  premiums  charged,  it  is  but  reason- 
able to  conclude  that  the  law  assumes  a  normal  and 
healthy  business  condition  under  which  adequate 
rates  will  be  received.  It  is  not  to  be  supposed 
that  the  law  assumes  that  business  will  be  con- 
ducted on  unsound  business  principles.  To  assume 
this  would  be  equivalent  to  imputing  to  the  law- 
makers a  degree  of  sanction  to  such  methods.  If, 
therefore,  unusual  and  unforeseen  conditions  ex- 
ist, if  periods  of  disastrous  rate  cutting  or  ruinous 
competition  prevail,  such  inadequate  premiums 
may  be  received,  that  the  unearned  premium  re- 
serve computed  thereon  in  accordance  with  the 
provisions  of  the  statute  may  produce  a  fund  in- 
sufficient to  protect  the  policy-holders  and  fail  of 
accomplishing  the  purpose  of  the  law.    The  ex- 


907 

aminer,  when  fully  satisfied  that  such  a  condition 
of  affairs  exists,  would  not  be  justified  in  ignoring 
it,  and  following  the  letter  of  the  law  without  com- 
ment or  warning. 

In  computing  the  unearned  premium  liability 
the  examiner  should  note  four  important  requisites 
to  a  correct  result : 

First. — That  the  premiums  with  which  he  is 
dealing  are  the  correct  premiums  charged  without 
deduction  for  commissions,  brokerage,  rebates  or 
policy  fees. 

Second. — That  they  include  the  premiums  on  the 
entire  business  of  the  company  in  force,  and  that 
no  agency,  sub-agency  or  ofiice  premiums  have  been 
overlooked  or  withheld. 

Third. — That  the  classification  as  to  year  written 
and  term  is  correct. 

Fourth. — That  the  correct  fraction  is  used  to 
produce  the  unearned  premium  corresj^onding  to 
the  unexpired  time  of  the  insurance.  In  order  to 
satisfactorily  establish  these  facts,  it  is  necessary 
for  the  examiner  to  go  back  to  original  data. 
Secondary  books  of  records,  such  as  expiration 
books,  unearned  premium  records,  or  agency  regis- 
ters, should  not  be  accepted  without  thorough  and 
ample  verification  from  original  data  as  agents' 
monthly  statements  and  daily  reports. 

Deductions  for  cancellations  must  be  made  from 


908 

the  business  of  the  year  in  which  the  cancelled  busi- 
ness was  written,  and  at  a  corresponding  rate  of  un- 
earned premium.  Instances  have  been  found  where 
companies  have  deducted  the  cancellations  made 
during  the  year  from  the  current  year' s  business, 
thus  reducing  premiums  on  which  ninety  per  cent, 
was  unearned  by  premiums  on  which  thirty  per 
cent,  or  even  ten  per  cent,  was  unearned. 

A  like  principle  must  be  observed  in  deductions 
for  re -insurances  effected  in  other  companies,  the 
solvency  of  the  re-insuring  company  being  ascer- 
tained before  deductions  are  made.  Re -insurances 
carried  by  the  company  under  examination  must 
be  classified  for  the  computation  of  unearned  pre- 
miums according  to  the  date  and  term  of  the  ori- 
ginal policy  and  included  at  the  amount  of  the 
original  premium. 

It  is  of  course,  well  known  that  unearned  pre- 
miums are  not  ordinarily  calculated  separately  on 
each  individual  policy.  The  business  is  grouped 
according  to  years  of  issue  and  terms  of  policjies, 
and  the  unearned  premiums  computed  upon  each 
group  on  the  basis  of  an  assumed  average  expira- 
tion of  time. 

To  conform  to  this  assumption  and  to  produce  a 
correct  amount  of  unearned  premium  liability  by 
the  use  of  the  unearned  premium  fractions  incor- 
porated in  the  department  annual  statement  blanks 


909 

it  is  necessary  that  the  business  shall  have  been 
written  uniformly  throughout  complete  calendar 
years,  or  complete  periods  of  twelve  months  dating 
from  the  time  of  examination.  If  it  is  found  that 
such  is  not  the  case  in  the  company^under  examina- 
tion, the  examiner,  in  order  to  arrive  at  the  correct 
amount  of  unearned  premium  liability,  must  classify 
the  policies  by  shorter  periods  than  twelve  months. 

It  will  frequently  be  found  that  a  comjiany  is 
chargeable  with  liabilities  of  a  miscellaneous  char- 
acter, not  shown  on  its  books  as  unpaid  bills  and 
accounts— accrued  salaries  and  rent — taxes  and 
other  items  of  a  similar  character.  These  should 
be  inquired  into  by  the  examiner  and  the  amount 
ascertained. 

The  matter  of  capital  stock  should  not  escape  his 
attention.  He  should  make  examination  as  to  the 
issues  of  shares  and  verify  the  amount  outstanding 
with  the  amount  authorized  by  its  charter  and  re- 
ported in  its  official  statements. 

A  comparison  of  the  experience  of  the  company 
during  the  period  under  examination  and  the  chief 
items  in  its  business  and  condition  with  those  of 
former  years  and  those  of  other  representative 
companies  of  known  reliability  will  disclose  the 
peculiar  characteristics  of  the  company  being  ex- 
amined and  enable  him  to  discover  the  direction  in 
which  its  affairs  are  tending. 


910 

In  conclusion  it  is  proper  to  add  that  this  paper 
does  not  undertake  to  treat  of  all  the  items  in  de- 
tail involved  in  the  examination  of  a  fire  insurance 
company,  nor  all  the  special  features  appertaining 
to  the  several  kinds  of  companies. 

It  devolves  upon  the  examiner  in  the  prosecution 
of  his  work  to  determine  vrhether  the  receipts  of 
the  company  have  been  derived  from  such  proper 
and  legitimate  business  sources  as  to  entail  no 
resultant  liability  on  it — whether  for  borrowed 
money,  borrowed  credit,  advances  or  otherwise  ; 
and  to  prove  the  correctness  and  integrity  of  the 
amount  of  premiums  upon  which  the  unearned  lia- 
bility is  computed  by  agreeing  the  same  with  the 
amount  of  premiums  entered  upon  the  books  of 
the  company  as  having  been  received  by  it ;  to  in- 
quire into  the  legitimate  and  Ijona  fide  character 
of  the  expenditures  of  the  company— whether  the 
rates  of  commissions  paid  are  consistent  with  busi- 
ness prudence  or  underwriting  experience — the 
existence  and  character  of  any  special  contracts 
relating  to  the  payment  of  commissions  or  the 
general  management  of  the  company,  as  affecting 
its  future  prosperity — the  question  of  favoritism 
shown  to  officers  or  stockholders  in  the  matter  of 
loans,  to  the  possible  injury  of  policy-holders  by 
impairing  the  security  or  endangering  the  financial 
stability  of  the  company — the  general  character  of 


911 

the  risks  in  force  and  tlie  relation  experienced  and 
existing  between  losses  and  expenses  incurred  and 
premiums  earned — and  the  official  acts  and  con- 
duct of  the  management  as  shown  in  the  minutes 
of  the  proceedings  of  its  board  of  managers. 

In  the  preparation  of  this  paper  the  writer  has 
benefited  by  the  examination  of  a  recently  pub- 
lished article  on  the  subject  of  the  examination  of 
a  fire  insurance  company  prepared  by  one  of  the 
prominent  underwriters  of  the  country. 


Chapter  III 


Casualty  Insurance, 

Corporate  Suretyship, 

Etc 


ACCIDENT  INSURANCE. 


EDSON  S.  LOTT  : 

IT  AMLET  remarks  of  his  players  :  "  Seneca  can- 
^  A  not  be  too  heavy  nor  Plautus  too  light  for 
them. ' '  It  appears  they  were  not  hard  to  please,  but 
the  play  is  not  always  the  thing.  The  audience  may 
have  something  to  say.  Blessed  is  the  man  who 
has  an  audience  that  will  listen  kindly  whether  he 
is  heavy  or  light.  For  one  who  is  immersed  in 
the  cares  of  business  to  be  invited  to  contribute  an 
article  on  accident  insurance,  is  apt  to  cause  him 
to  lose  sight  of  the  compliment  in  the  difficulty  of 
the  undertaking.  If  I  am  asked  for  a  paper  which 
by  its  weight  will  act  as  a  sinker,  and  counteract 
any  undue  buoyancy  of  the  volume  in  which  it  is  to 
appear,  the  task  is  not  so  formidable.  On  the  other 
hand,  to  extract  a  light  and  airy  grace  from  the 
severe  material  of  personal  accident  insurance,  the 
adorning  touch  of  genius  would  be  required.  In- 
deed, if  I  felt  competent  to  do  any  carving  and  gild- 


916 

ing  of  literary  frescoes,  I  would  select  some  other 
subject.  I  will  fulfill  all  that  can  be  expected  of  me 
if  in  a  desultory,  conversational  way  I  put  down  a 
few  thoughts  and  recall  one  or  two  instances  sugges- 
ted by  a  reversionary  glance  over  an  experience  of 
some  years  in  the  casualty  business.  If  they  are  not 
recommended  by  their  novelty,  I  hope  that  some 
of  them  will  meet  the  approval  of  those  more 
versed  in  the  principles  of  accident  insurance. 

The  elements  of  a  science  are  often  the  last  to  be 
mastered.  I  remember  once  being  present  when  a 
candidate  for  the  bar  was  examined  for  admission 
in  open  court.  The  first  examining  attorney 
opened  the  ceremony  by  wliat  appeared  to  be  a 
very  simple  and  idle  question  : 

^' What  is  a  thing?" 

It  was  a  poser,  and  had  the  effect  of  completely 
clouding  the  intellect  of  the  postulant  for  unholy 
orders.  I  was  given  to  understand  that  the  ques- 
tion had  some  mysterious  relation  to  Blackstone's 
division  of  "things"  into  ''real,  personal  and 
mixed."  The  young  gentleman  came  under  the 
third  class. 

Suppose  I  ask  my  learned  colleagues  : 

*'  What  is  an  accident  ?  " 

A  clear  and  complete  answer  would  vastly 
simplify  the  work  of  claim  examiners.  It  is  in 
vain  that  they  appeal  to  the  dictionary.     When 


917 

some  proud  youth  imagines  lie  has  hit  upon  a  re- 
liable formula,  the  endless  cup-chain  of  events 
dips  down  into  the  bottomless  well  of  life  and 
brings  to  the  surface  a  new  and  unthought-of  com- 
bination of  circumstances  which  mashes  the 
formula  into  little  bits.  However,  all  casualty- 
companies  agree  that  an  accident  is  ''an  injury 
effected  through  external,  violent  and  accidental 
means."  An  accident  is  effected  through  acci- 
dental means.  Is  that  so?  An  accident  is — 
an  accident.  This  is  very  clear  and  satisfy- 
ing. I  will  not  attempt  to  do  what  no  one  else 
has  ever  accomplished — give  a  perfect  and  satis- 
factory definition  of  an  accident.  But  in  a  round- 
about fashion,  I  may  suggest  one  way  of  defining 
this  difficult  and  elusive  object,  which  defies  all  in- 
tellectual efforts  to  grasp  it.  Accident  insurance 
assumes  to  indemnify  for  injuries  where  chance, 
not  design,  is  the  author.  Accident  insurance 
steps  in  where  the  law  steps  out.  It  assumes 
liability  where  the  assured  otherwise  would  be 
remediless.  The  law  says:  ''The  act  of  Grod 
hurts  no  one."  This  is  one  of  those  pretty  legal 
fictions.  The  act  of  God  hurts  and  hurts  badly, 
but  does  not  hurt  by  the  machinery  of  the  law, 
though  it  does  create  havoc  through  the  forces  of 
nature.  A  cyclone,  a  tornado,  or  a  stroke  of 
lightning  is  an  act  of  Gfod  which  has  been  known 


918 

to  be  extremely  hurtful.  It  is  agg^inst  such  ac- 
cidents as  these  that  casualty  insurance  provides 
money '  indemnity,  where  the  victim  would  be 
helpless  and  without  remedy  at  law.  By  the  way, 
I  hope  my  allusions  to  the  law  will  not  expose  me  to 
the  suspicion  of  being  a  lawyer,  one  of  those  gen- 
tlemen whose  delight  is  to  make  insurance  com- 
panies spend  restless  nights. 

Realizing  the  difficulty  in  defining  what  is  an 
accident,  insurance  policies  attempt  more  success- 
fully to  state  what  is  not  an  accident  within  the 
meaning  of  the  policy  contract.  Disappearances, 
suicide,  injuries  resulting  from  fits,  vertigo  or  in- 
toxicants, voluntary  exposure  to  unnecessary  dan- 
ger, dueling,  fighting,  war  or  riot,  violating  law, 
adventures  into  uncivilized  lands,  and  riding  on 
conveyances  not  intended  for  the  transportation  of 
passengers — these  casualties  are  ordinarily  ex- 
cluded from  the  purview  of  an  accident  insurance 
policy.  But  even  in  exclusions  companies  are  not 
agreed.  The  tendency  of  American  companies  is 
to  shut  out  fewer  and  fewer  causes  of  bodily  in- 
jury. They  even  pay  for  injuries  which  are  in  no 
wise  accidental,  such  as  those  which  are  inflicted 
by  burglars  and  highwaymen. 

I  have  shown  how  hard  it  is  to  describe  in 
language  what  is  an  accident.  This  is  the  more 
strange  since  we  are  taking  lessons  every  day  from 


919 

our  claim  departments  and  the  courts.  There  would 
not  appear  to  the  uninstructed  mind  anything  ac- 
cidental about  a  mosquito  bite.  The  perverted 
and  industrious  ingenuity  with  which  this  enemy 
of  man  seeks  its  prey,  leaves  nothing  to  chance, 
yet  we  have  had  claims  on  account  of  mosquito 
bites,  and  some  courts  are  disposed  to  view  the  ruin 
wrought  by  this  miscreant  as  accidental.  All  will 
remember  a  famous  case  decided  last  year  in  which 
a  casualty  company  was  held  to  be  liable  for  the 
consequences  of  wearing  a  tight  shoe.  If  this 
opinion  be  universally  adopted,  in  insuring  ladies 
hereafter  it  will  be  well  to  require  a  statement  in 
the  application  of  the  number  of  their  gaiter  and 
the  last. 

Accident  insurance  manuals  attempt  to  name  the 
hazard  which  surrounds  each  particular  occupa- 
tion. Undoubtedly,  in  the  chances  and  changes  of 
this  mortal  life,  different  men  are  exposed  to  differ- 
ent degrees  of  danger.  The  steeple-climber  who 
gilds  the  cross  and  ball  at  the  summit  of  the  con- 
secrated spire,  is  more  apt  to  meet  with  serious  in- 
jury than  the  holy  father  who  spends  his  time  in 
his  study,  culling  beautiful  and  inspiring  sentiments 
from  the  sacred  writers  and  eloquent  ecclesiasts  of 
past  ages.  N'evertheless,  no  man  is  justified  in  be- 
lieving himself  to  be  secure  from  the  fatal  or  non- 
fatal consequences  of  some  unlucky  misadventure. 


920 

Even  within  the  safe  precincts  of  the  domestic 
hearth,  a  serious  mishap  may  disable  the  indus- 
trious house- wife  or  the  lord  of  the  establishment, 
who  is  resting  from  his  labors.  I  know  of  no 
more  striking  illustration  of  the  universal  expos- 
ure to  accidental  injuries  than  a  case  that  hap- 
pened in  Washington  City  a  few  months  ago. 
The  victim  of  misplaced  confidence  described  the 
injury  in  a  letter,  from  which  I  make  the  follow- 
ing extract : 

''On  the  morning  in  question,  on  entering  the 
kitchen,  my  wife,  who  had  been  using  a  fiat-iron, 
told  me  to  let  her  remove  a  crease  in  my  pants, 
saying  at  the  time  that  the  iron  was  not  hot.  I 
placed  my  limb  in  position  on  a  chair,  she  placed 
a  damp  cloth  over  the  place  or  crease  and  put  the 
iron  over  this.  The  iron  being  hotter  than  either 
of  us  supposed,  drove  the  steam,  thus  generated, 
through  the  pants  to  the  flesh,  thus  steaming 
a  place  the  full  length  and  nearly  the  width  of 
the  face  of  the  iron,  about  two  inches  by  six 
inches,  on  my  leg  from  the  knee-cap  upwards. 
During  the  day  it  caused  a  great  deal  of  discom- 
fiture and  irritation,  at  night  it  was  blistered  the 
whole  length  of  the  burn  in  small  blisters.  I  had 
occasion  during  the  night  to  arise,  and  while  grop- 
ing about  the  room  struck  my  leg  against  the 
trunk,  bursting  the  blisters  and  tearing  away  the 


921 

skin  on  fully  one-third  of  the  burn  immediately 
above  the  knee-cap.  It  pained  more  or  less  all 
night,  and  up  to  the  present  time  sometimes  is 
very  painful,  especially  in  going  up  steps  or  rais- 
ing my  leg,  it  being  the  right  leg.  It  is  very  stiff 
and  gives  a  great  deal  of  inconvenience." 

Accident  insurance  is  no  longer  an  infant  in 
swaddling  clothes.  By  reason  of  the  large  amount 
of  capital  employed  and  the  vast  sums  contributed 
yearly  in  the  shape  of  indemnity  to  the  assured,  it 
has  taken  its  rightful  and  serious  position  among 
important  enterprises,  and  is  more  and  more  at- 
tracting the  favor  and  acceptance  of  the  insurable 
public.  It  is  a  serious  business,  and  should  be 
always  handled  seriously.  As  this  article,  how- 
ever, is  not  intended  to  be  altogether  serious,  it 
might  not  be  out  of  place  to  alleviate  its  solemn 
character  by  relating  the  unfortunate  consequences 
that  ensued  several  months  ago  from  the  failure 
on  the  part  of  a  gentleman  in  the  home  office  to 
keep  in  mind  the  importance  and  dignity  of  cas- 
ualty insurance. 

The  'New  York  papers  published  in  their  tele- 
graiohic  column  a  report  of  a  great  barbecue  in  the 
chief  city  in  Colorado.  According  to  the  report, 
in  the  mad  haste  of  the  hungry  thousands  to  de- 
stroy their  share  of  the  enticing  barbecued  meat,  a 
number  of  guests  were  choked  to  death.     Now  it 


922 

happens  that  our  company  issues  policies  which 
cover  choking  by  swallowing.  In  a  jocular  mo- 
ment our  Colorado  agent  was  served  with  the  fol- 
lowing notice :  '^  Please  take  up  all  policies  which 
provide  indemnity  for  choking  to  death  by  swal- 
lowing." Somebody  violated  confidence,  and  a 
leading  newspaper  of  Denver,  with  the  omnis- 
cience of  the  press,  got  wind  of  this  private  com- 
munication. Choking  with  rage,  the  editor  gave 
a  column  and  a  scare  head  to  the  alleged  serious 
action  of  the  company,  in  the  course  of  which  he 
said: 

''When  reports  of  the  Denver  Barbecue  reached 
the  New  York  office,  an  emergency  meeting  of  the 
directors  was  at  once  called  and  the  dangers  of  the 
situation  fully  set  forth  in  all  their  awful  details. 
It  was  determined  that  the  company  should  take 
immediate  action  to  prevent  the  destruction  of 
their  assets  through  the  greed  of  policy-holders 
who  attended  the  Denver  Barbecue,  stood  on  the 
prostrate  forms  of  weaker  men,  and  shouted  for 
wolf  meat  ancL  preferred  it  raw.  Accordingly  the 
general  agent  of  the  company  in  Colorado  was 
notified  to  take  up  all  policies  which  j^rovide  in- 
demnity for  choking  to  death  by  swallowing.  The 
agent  replied  :  '  Thank  God  we  have  something 
out  here  to  choke  on.  Since  the  wave  of  pros- 
perity struck  the  New  England  States  I  find  there 


923 

are  many  cotton  workers  choking  to  death  for 
want  of  something  to  eat.'  " 

Personal  or  individual  accident  insurance  has 
perhaps  undergone  fewer  changes  than  most  other 
lines  of  insurance.  Personal  accident  insurance 
has  been  written  in  this  country  for  something 
over  a  quarter  of  a  century.  It  was  origin- 
ally intended  to  cover  the  risk  of  travel,  but  soon 
was  broadened  to  cover  all  accidents  whether 
fatal  or  non-fatal.  When  railroads  were  not  so 
universally  patronized  as  at  present,  th^re  existed 
a  feeling  of  distrust  against  their  safety,  now  com- 
mon to  those  people,  who  have  never  been  abroad, 
against  the  ocean.  While  accident  insurance  was 
originally  intended  to  cover  the  hazard  of  travel, 
there  really  is  no  extra  hazard  now  attending  trav- 
eling by  the  ordinary  means  of  public  conveyance, 
yet  to  this  day  there  exists  a  greater  or  lesser  feel- 
ing that  one  is  liable  to  meet  with  an  accident 
while  traveling  by  rail. 

In  fact,  railroad  accidents,  owing  to  inventions 
and  improvements,  contribute  a  very  small  per- 
centage of  the  claims  made  upon  casualty  compa- 
nies. A  legal  authority  on  the  law  of  accident 
insurance  in  a  work  published  in  1894  says  :  "  It  is 
frequently  said  that  the  claims  for  injuries  or 
death  growing  out  of  the  use  of  horses  and  car- 
riages exceed  in  number  those  arising  from  all 


924 

other  causes  combined."  This  statement  is,  no 
doubt,  gross  exaggeration.  The  bicycle  has  grown 
into  general  use,  and  it  rivals  the  horse  as  a  fruit- 
ful cause  of  accidental  injuries.  Out  of  three 
thousand  eight  hundred  and  nineteen  claims  paid 
under  accident  insurance  policies,  five  hundred  and 
seven  were  for  bicycle  accidents,  four  resulting  in 
death.  Out  of  $408,448.75  paid  under  accident 
policies,  $44,285.49  were  for  bicycle  accidents,  of 
which  $18,000  was  paid  for  death  and  $25,285.49  for 
Indemnity. 

But  I  will  not  pretend  to  furnish,  in  the  brief 
space  allotted  me,  any  tables  of  insurance.  Acci- 
dent insurance  is  not  an  exact  science,  but  this  is 
no  reason  why  we  should  not  strive,  with  lapse  of 
time  and  enlarged  experience,  to  approximate 
greater  and  greater  accuracy.  A  full  and  free  ex- 
change of  views  and  experience  will  lift  the  busi- 
ness to  a  higher  and  higher  plane.  It  is  important 
that  companies  should  make  and  preserve  careful 
tables  showing  their  losses  under  policies  which 
provide  specific  indemnities,  partial  disability,  and 
sick  benefits.  These  departures  from  original 
lines  are  of  undetermined  value  to  the  assured  and 
of  doubtful  profit  to  the  insurer. 

A  wide  difference  of  opinion  prevails  among 
companies  as  to  the  age  beyond  which  insurance 
ceases  to  be  profitable.    The  age-limit  ranges  be- 


925 

tween  sixty  and  seventy  years.  With  reliable 
means  of  computing  losses  at  this  time  of  life,  we 
can  do  away  with  the  injustice  of  cancelling  a 
man's  policy  when  he  reaches  the  age-limit.  It 
would  seem  to  be  fairer  to  continue  his  insurance 
at  an  increased  premium  rate. 

Those  companies  who  attach  riders  to  their  poli- 
cies permitting  the  assured  to  use  irregular  meth- 
ods of  transportation,  such  as  locomotive  or  freight 
cars,  to  go  upon  railroad  beds,  to  engage  occasion- 
ally in  prohibited  occupations,  would  add  materi- 
ally to  our  stock  of  knowledge  by  counting  the 
cost  of  this  supplementary  form  of  insurance  and 
exchanging  with  other  companies  their  experience. 

Imperfect  induction  is  a  hazard  to  which  every 
accident  insurance  company  is  exposed,  and  it  is 
responsible  for  many  errors  in  our  manuals.  I  am 
trying  to  show  that  a  fuller  and  franker  inter- 
course between  companies  will  necessarily  improve 
the  business  of  accident  insurance.  It  is  not  neces- 
sary now  to  argue  in  behalf  of  the  utility  of  this 
branch  of  insurance.  On  the  other  hand,  no  argu- 
ment is  necessary  to  demonstrate  that  the  policies 
now  issued  are  capable  of  improvement.  But  when 
we  attempt  to  make  changes  in  the  direction  of 
more  comprehensive  and  acceptable  policies  we 
should  have  the  guidance  of  ample  and  reliable 
data.      If   we   only  had   at  hand   the  benefit   of 


926 

adequate  experience,  there  is  no  reason  why  a 
policy  should  not  be  framed  which  is  uncondi- 
tional, nor  is  there  any  reason  why  a  schedule  of 
rates  cannot  be  arranged  so  as  to  comprise  the 
most  hazardous  occupations,  those  occupations 
which  are  really  most  in  need  of  insurance  pro- 
tection. 

Accident  insurance,  in  the  determination  of  a 
schedule  of  rates  and  a  classification  of  risks,  meets 
with  much  of  the  difficulty  fire  insurance  contends 
with — the  lack  of  co-operation  of  companies  and 
reluctance  to  exchange  experience  and  data  from 
which  to  build  a  classification  table  of  hazards. 

I  am  of  the  opinion  that  such  a  compilation  of 
experience  will  not  be  possible  for  years  to  come  if 
left  to  the  voluntary  action  of  the  companies,  and 
it  may  be  well  for  the  Convention  of  Insurance 
Commissioners  to  consider  whether  the  interests  of 
the  public  and  of  personal  accident  insurance  can- 
not best  be  served  by  eliminating  from  the  present 
statement  blank  some  of  the  unnecessary  require- 
ments and  in  their  place  requiring  a  classification 
of  losses.  In  a  few  years  such  classification  would 
create  a  table  of  experience  from  which  could  be 
derived  an  approximate  schedule  of  rates  and  a 
scientific  reserve  determined  for  this  line  of  insur- 
ance. Not  that  it  would  be  well  to  go  too  deeply 
into  this  matter  of  a  classification  of  losses  in  the 


927 

reports  to  the  insurance  departments.  Indeed, 
that  would  be  a  useless  hardship  on  the  companies. 
But  the  losses  for  death  indemnity,  specific  indem- 
nity, total  disability  indemnity,  partial  disability 
indemnity  and  sick  benefits  could  be  readily  sub- 
divided, and  would  be  of  equal  value  to  the  insur- 
ance departments  and  the  companies. 

One  more  observation  and  I  will  conclude.  The 
field  of  accident  insurance  is  as  wide  as  the  civil- 
ized world,  but  it  is  only  cultivated  in  patches. 
Let  us,  therefore,  never  forget  that  there  is  room 
for  all  the  companies  now  in  existence  and  space 
for  more  to  come.  Antagonisms  and  undue  cheap- 
ening premium  rates  are  suicidal. 

I  am  acquainted  with  a  city  of  considerable  size 
in  which  the  merchants  seem  to  be  all  in  a  tacit 
league  to  uphold  one  another's  credit,  particularly 
where  the  interests  of  an  outsider  are  alone  con- 
cerned. That  is  .a  strikingly  prosperous  city.  As 
a  rule,  casualty  companies  are  in  no  need  of  facti- 
tious support  for  their  credit.  Those  that  cut  any 
considerable  figure  in  the  commercial  world  can 
rely  upon  their  resources  and  their  reputation  for 
prompt  adjustment  of  losses  to  sustain  their  finan- 
cial standing.  Nevertheless,  there  is  no  company 
so  well  established  as  to  be  entirely  beyond  the 
reach  of  injury  from  continual  assaults  of  com- 
petitors.    "  Live  and  let  live"  should  be  the  pre- 


928 

vailing  rule  of  conduct.  For  every  accident  insur- 
ance company  that  is  properly  equipped  and  well 
conducted  the  world  is  amply  able  and  willing  to 
furnish  a  handsome  subsistence. 


EMPLOYERS'  LIABILITY  INSURANCE. 


W.  F.  MOORE : 

IT  is  perliaps  pertinent  to  a  discussion  of  this  sub- 
ject to  trace  the  cause  for  the  establishment 
of  this  form  of  insurance.  The  necessity  for  such 
insurance  has  for  its  foundation  the  burdens  im- 
posed upon  employers  by  the  workings  of  that 
branch  of  the  law  relating  to  negligence,  so  called. 
Negligence  law,  however,  exisfced  in  some  form 
as  far  back  as  there  is  any  definite  record,  no  one 
having  yet  been  able  to  clearly  determine  just 
when  and  where  it  commenced.  Employers' 
Liability  Insurance,  on  the  other  hand,  is  a  com- 
paratively new  institution,  its  introduction  in  the 
United  States  dating  back  to  less  than  twelve 
years  ago,  although  it  had  been  in  operation  in 
Europe  for  a  short  period  prior  to  that  time. 

It  may  be  well,  therefore,  to  trace  in  outline 
what  is  very  aptly  termed  the  "  evolution  of 
negligence  law"   down  to  the  time    when    Em- 


930 

ployers'    Liability  Insurance  was   adopted  as  a 
means  of  protection  against  its  application. 

In  early  times  there  were  no  such  fine  dis- 
tinctions as  respects  negligence  as  exist  to-day. 
Suits  for  damages  were  rare  and  the  plaintiff 
was  usually  obliged  to  prove  the  damage  to  have 
been  the  result  of  wilful  act. 

But  while  Employers'  Liability  Insurance  is 
distinctly  a  modern  need,  due  to  the  great  growth 
of  negligence  actions  in  the  past  twenty  years, 
the  law  of  negligence  has  been  at  least  three 
centuries  in  building.  Its  beginning  is  lost  in 
the  obscurity  of  feudalism,  in  which  the  master, 
as  the  owner,  virtually,  of  the  body  of  his  servant, 
answered  upon  the  field  of  arms  to  those  outside 
Ms  household  who  were  injured  by  the  wrong  of 
his  servants  or  henchmen.  Under  the  feudal 
regime  there  was,  of  course,  no  recognition  of 
any  right  of  the  servant  against  the  master  for 
the  latter' s  negligence.  A  feudal  master  in  his 
own  household,  like  a  king,  could  do  no  wrong. 

The  statute  of  Westminster  II  (1295  A.  D.), 
allowing  the  Chancellor  to  grant  a  new  form  of 
action  for  injury  to  person  or  property,  marks 
perhaps  the  first  recorded  recognition  of  a  legal 
remedy  for  negligence.  In  the  reign  of  the 
Plantagenet  kings  the  year-books  record  no  cases 
of  this  character.      In    Comyn's    Reports   (1695- 


931 

1740)  is  found  the  first  collection  of  negligence 
cases. 

Blackstone,  whose  now  classic  "  Commen- 
taries "  afford  us  the  earliest  authoritative  exposi- 
tion of  English  law  in  its  formative  stages, 
refers  only  briefly  to  the  master's  liability  to 
third  persons  for  his  servant's  negligence  and 
does  not  even  mention  the  idea  of  a  master  being 
liable  to  his  employe  for  his  own  negligence. 

Blackstone  says :  "If  a  servant  by  his  negli- 
gence does  any  damage  to  a  stranger,  the 
master  shall  answer  for  his  neglect;  if  a  smith's 
servant  lames  a  horse  while  he  is  shoeing  him, 
an  action  lies  against  the  master  and  not  against 
the  servant,  but  in  these  cases  the  damage  must 
be  done  while  he  is  actually  employed  in  the 
master's  service,  otherwise  the  servant  shall 
answer  for  his  own  misbehavior.  Upon  this 
principle,  by  the  common  law,  if  a  servant  kept 
his  master's  tire  negligently  so  that  his  neigh- 
bor's house  was  burned  down  thereby,  an  ac- 
tion lay   against  the   master." 

How  great  the  contrast  between  the  servant's 
position  in  that  day  and  in  this  is  emphasized  by 
the  further  statement  of  the  same  author,  that  if 
a  fire  occurs  in  the  master's  house  through  the 
negligence  of  any  servant,  such  servant  shall  for- 
feit one  hunded  pounds  to  be  distributed  among 


932 

the  sufferers,  and  in  default  of  payment  shall  be 
committed  to  some  workhouse  and  there  kept  to 
hard  labor  for  eighteen  montlis. 

Somewhat  later  we  find  the  earliest  recorded 
attempt  by  an  English  Judge  to  formulate  the  law 
of  negligence.  After  an  exhaustive  analysis  of  the 
Roman  law,  Lord  Holt  in  the  celebrated  case  of 
Coggs  vs.  Barnard  (2  Lord  Raymond,  909),  in  the 
year  1704  defined  three  degrees  of  negligence,  viz. : 
gross,  ordinary  and  slight,  varying  in  proportion 
to  the  degree  of  care  assumed  by  the  person 
charged  with  negligence  in  the  act  or  occupation 
involved. 

The  growth  of  that  spirit  of  individual  responsi- 
bility which  characterizes  and  animates  all  Anglo- 
Saxon  jurisprudence  soon  led  the  English  Judges 
to  lay  down  one  broad  rule  of  duty  which  has  since 
been  the  basis  of  the  law  of  negligence,  and  which, 
after  many  modifications,  is  crystallized  in  a 
modern  definition  as  follows:  ''Negligence,  con- 
stituting a  cause  of  civil  action,  is  such  an  omis- 
sion, by  a  responsible  person,  to  use  that  degree  of 
care,  diligence  and  skill  which  it  was  his  legal 
duty  to  use  for  the  protection  of  another  person 
from  injury  as,  in  a  natural  and  continuous  se- 
quence, causes  unintended  damage  to  the  latter." 

The  early  cases  recognized  the  liability  of  the 
master  only  to  the  public  or  to  third  persons.    The 


983 

great  mass  of  law  from  whicli  has  been  evolved  the 
employer's  liability  to  his  own  servants  for  his 
negligence  or  for  the  negligence  of  one  represent- 
ing him  in  the  pursuance  of  the  employer's  duty  is 
the  product  of  the  present  century.  The  master's 
duty,  so  elaborately  presented  in  the  Employers' 
Liability  Acts  of  four  of  our  States  and  in  many 
State  constitutions,  with  its  intricate  modifications, 
is  the  product  of  the  present  generation. 

It  is  a  striking  fact  that  more  suits  for  negli- 
gence have  been  tried  in  the  Supreme  Court  of 
New  York  in  the  last  ten  years  than  in  all  the 
previous  experience  in  that  tribunal. 

Following  old  world  history,  therefore,  we  may 
look  upon  the  evolution  of  the  law  of  the  master' s 
or  employer's  liability  as  an  ever  growing  tendency 
of  the  times,  due,  doubtless,  in  large  measure,  to 
the  changes  in  the  social  and  industrial  condition 
of  the  working  classes  as  well  as  their  greater  de- 
mands and  their  increased  political  importance. 

The  changes  in  law  thus  far,  however,  have 
been  gradual.  New  rules  and  tests  have  been 
from  time  to  time  adopted  until  the  conditions 
reached  a  point  where  the  responsibilities  of  the 
employer  became  so  burdensome  that  he  was 
obliged  to  look  about  him  for  some  means  of  pro- 
tection in  addition  to  the  exercise  of  ordinary 
care   and  foresight  in  the  actual  conduct  of  his 


934 

work.  The  employer  with  a  limited  amount  of 
capital  was  in  constant  danger  of  disaster  to  his 
business  by  reason  of  exorbitant  verdicts  obtained 
because  of  some  technical  negligence  for  which  he 
might  not  be  actually  and  morally  responsible, 
but  for  which  the  law  might  construe  the  liability 
against  him. 

This  contingency  seemed  to  be  a  proper  subject 
for  insurance  and,  without  going  into  the  details  of 
the  specific  Parliamentary  acts  which  finally  caused 
the  organization  of  companies  for  the  issuing  of 
policies  of  insurance  providing  indemnity  for  loss 
by  reason  of  the  legal  liability  of  the  employer,  it 
has  perhaps  been  pointed  out  with  more  or  less  clear- 
ness that,  while  there  was  no  recognized  necessity  for 
such  insurance  in  early  times,  the  evolution  of  the 
law  of  negligence  brought  about  a  demand  which 
was  finally  met  by  Employers'  Liability  Insur- 
ance. 

But  let  us  not  lose  sight  of  the  fact  that  while 
this  demand  was  met  when  the  want  was  most  felt, 
the  introduction  of  insurance  as  a  protection  has 
by  no  means  stopped  the  march  of  progress  in 
negligence  law. 

The  premium  rates  originally  charged  are  found 
now  in  many  cases  to  be  totally  inadequate,  not  in 
every  case  because  of  faulty  judgment  in  the  be- 
ginning,  but  because  the  cost  to  the  insurance 


935 

company  has  been  vastly  increased  by  a  continued 
disposition  on  the  part  of  Courts  and  Legislatures 
to  draw  the  lines  closer  and  place  greater  burdens 
on  the  employer,  which  burdens,  by  reason  of  in- 
surance, fall  upon  the  comjDanies. 

As  an  indication  of  the  trend  of  public  opinion 
in  the  direction  of  "reform"  in  the  relationship 
between  employer  and  employed,  the  following 
quotation  is  made  from  a  volume  entitled  ' '  Work- 
ingmen's  Insurance"  recently  published  by  Mr. 
William  Franklin  Willoughby,  of  the  United 
States  Department  of  Labor  : 

"  Step  by  step  we  have  seen  almost  all  of  the 
'  European  nations  abandon  the  position  that  em- 
'  ployes  have  no  claim  for  damages  except  when 
'  they  can  prove  negligence  on  the  part  of  their 
'  employers,  in  favor  of  the  one  where  their  com- 
'  pensation  by  the  employers  should  be  compul- 
'  sory  in  all  cases  except  where  they  are  wilfully 
•  and  seriously  at  fault.  The  indemnification  of 
'  injured  workingmen  has  thus  been  made  one  of 
'  the  normal  items  in  the  cost  of  operation,  to  be 
'  taken  account  of  as  any  other  charge.  At  the 
'  same  time,  the  efforts  to  enforce  this  system 
'  through  the  law  Courts  has  been  abandoned, 
'  and  the  position  taken  that  adequate  and  prompt 
'  compensation  can  only  be  secured  where  the 
'  amount  of  the  compensation  is  determined  in 


936 

'  advance  by  a  fixed  scale  of  indemnities.     It  is 

*  only  as  thus  organized,  moreover,  that  employ- 
'  ers  are  able  to  take  account  of  the  risks  that  they 
'  run  and  provide  against  them  by  means  of  insur- 
'  ance. 

''  While  this  movement  has  been  going  on  in 
'  Europe,  the  United  States  has  stood  practically 

*  still.  Scarcely  a  beginning  has  been  made 
'  toward  modifying  the  unjust  provisions  of  the 
'  old  common  law.  It  is  quite  beyond  our  field 
'  to  attempt  any  description  of  the  state  of  the 
'  law  regarding  employers'  liability  in  the  United 
'  States  at  the  present  time.  The  subject  is  one 
'  of  great  complexity,  and  here  we  are  concerned 
'  with  the  principle  rather  than  the  details  of 
'  legislation.  It  is  sufficient  to  say  that  the 
'  United  States  are  in  the  position  where  the  in- 
'  justice  of  the  common  law  in  respect  to  this 
'  question  is  more  or  less  recognized,  and  at- 
'  tempts  are  being  made  to  bring  about  a  reform 
'  through  legislation  and  judicial  decisions.  The 
'  States  are  thus   still  in    that    primitive    stage 

*  where  a  solution  is  sought  in  the  timid  modifica- 
'  tion  of  the  doctrine  of  common  employment,  of 

*  what  constitutes  negligence,  and  other  subtili- 
'  ties  of  the  law.     They 'are  thus  attempting  a 

*  method    of    reform    long    since  abandoned  by 

*  European  nations  as  one  which  not  only  does 


937 

*'  not  do  justice  to  the  workingman,  but  is  thor- 
*'  oughly  inadequate  to  solve  the  difficulties  of 
*'  the  question.  It  would  be  difficult  to  think  of 
*'  another  field  of  social  or  legal  reform  in  which 
''  the  United  States  is  so  far  behind  other  nations. 

"The  most  depressing  feature  of  the  situation 
''  lies  in  the  fact  that  the  very  principles  involved 
*' in  this  gradual  evolution — from  the  limited  lia- 
*'  bility  of  employers  to  that  of  the  compulsory 
"indemnification  by  them  of  practically  all  in- 
"jured  employes— are  as  yet  not  even  compre- 
"hended  in  the  United  States.  Evidently  it  is 
''useless  to  expect  any  decided  legislation  until 
"the  people  generally  are  made  to  see  the  just- 
"  ness  and  correctness  of  the  position  for  which 
"we  are  contending  and  which  has  so  recently 
"been  assumed  by  Great  Britain.  The  first  step, 
"therefore,  consists  in  the  education  of  public 
"  opinion.  This  once  accomplished,  legislation 
"  will  inevitably  follow." 

Mr.  Willoughby  writes  from  the  standpoint 
of  the  philanthropist,  having  in  mind  only  the 
protection  of  the  workingman  and  his  family 
against  want  and  suffering  occasioned  by  loss  of 
work  or  support ;  but  there  is  a  close  relationship 
between  the  movement  for  bettering  the  con- 
dition of  the  workmen  at  the  expense  of  the  em- 
ployer and  the  insurance  of  the  employer  against 


938 

unmeritorious  claims,  especially  when  the  move- 
ment comprehends  a  practical  removal  of  all  the 
defenses  of  the  employer  and  by  so  much  increases 
the  hazard  assumed  by  the  insurance  company. 

It  is  not  likely  that  any  such  radical  change 
will  be  made  at  once  in  this  country,  but  we  can- 
not fail  to  observe  the  rapid  strides  made  by 
European  countries  in  the  direction  of  an  im- 
provement in  the  condition  of  the  working  classes 
and  to  note  that  wherever  such  movements  are 
taking  place  the  difficulties  of  Employers'  Lia- 
bility Insurance  increase  and  its  operations  be- 
come more  complicated. 

Employers'  Liability  Insurance  in  the  United 
States  is,  however,  now  an  accomplished  fact 
and  a  recognized  necessity  among  employers  of 
labor,  and,  whatever  may  be  its  final  development, 
we  are  able  at  least  to  take  a  retrospective  view 
and  profit  by  past  experience  so  far  as  it  may  be 
of  value  as  a  guide  for  the  future. 

The  year  1887  was  the  first  year  in  which 
Liability  Insurance  was  written  in  this  country 
to  any  extent.  While  some  few  policies  had  been 
issued  prior  to  that  time,  it  was  not  until  1887 
that  the  business  was  taken  up  and  prosecuted 
in  any  appreciable  degree  In  that  year  the  pre- 
miums received  on  Employers'  Liability  Insur- 
ance policies  in  this  country  amounted  to  about 


939 

$150,000.  From  that  time  on  for  the  ensuing 
ten  years  the  increase  in  business  was  very- 
marked.  The  following  schedule  shows  the 
amounts  written  in  each  year  during  that  period. 


1887, 

$  150,000 

1888, 

300,000 

1889, 

650,000 

1890, 

1,120,000 

1891, 

2,100,000 

1892, 

3,000,000 

1893, 

3,500,000 

1894, 

3,700,000 

1895, 

4,000,000 

1896, 

4,250,000 

1897, 

4,700,000 

For  the  first  few  years  these  amounts  are  neces- 
sarily estimated,  because  the  reports  of  the  vari- 
ous companies  to  the  insurance  departments  did 
not  clearly  state  the  amount  of  insurance  written 
in  each  line,  and  as  most  of  the  companies  did 
a  multiform  business  it  is  difficult  to  ascertain 
the  exact  amount  written ;  it  may  be  assumed, 
however,  that  the  figures  given  are  approximately 
correct.  It  will  be  seen  from  this  schedule  that 
the  increase  from  1889  to  1892  was  greater  than  at 
any  other  period ;  and  this  may  be  properly  ac- 
counted for  by  reason  of  the  fact  that  during  these 


940 

years  several  companies  undertook  the  insuring  of 
common  carriers  at  large  premiums  without  hav- 
ing any  proper  basis  of  rate.  This  line  has  been 
practically  abandoned  by  all  of  the  companies, 
and,  considering  that  nearly  all  of  such  business 
was  dropped  after  1893,  the  increase  in  business 
from  1893  to  1897  really  means  more  than  would 
appear  from  the  face  of  the  foregoing  table.  In 
other  words,  the  loss  of  all  the  common  carriers 
business  had  to  be  made  up  by  other  business, 
and  notwithstanding  this  fact  there  was  an  actual 
increase,  so  that  in  the  year  1897  the  amount  of 
premium  collected  by  all  stock  companies  was 
nearly  $5,000,000.  The  amounts  given  as  collected 
in  the  years  1895,  1896  and  1897  are  actual  figures 
as  taken  from  the  insurance  reports,  but  the 
schedule  does  not  include  business  written  by 
mutual  or  Lloyds  companies,  which  would  some- 
what increase  the  total. 

The  natural  deduction  is,  that  the  scope  of 
Liability  Insurance  is  almost  unlimited.  It  is  not 
confined  by  any  means  to  the  manufacturing  in- 
dustries nor  alone  to  employers  of  labor.  It  has 
been  extended  from  time  to  time  to  cover  liability 
for  personal  injuries  however  occasioned,  so  that, 
what  was  originally  known  as  "Employers' 
Liability  Insurance "  might  be  more  correctly 
called  ''Liability  Insurance." 


941 

Every  year  some  new  requirement  for  such  in- 
surance appears,  and  it  is  fair  to  assume  that  we 
have  not  by  any  means  reached  the  limit  of  the 
scope  of  this  class  of  insurance. 

While  Employers'  Liability  Insurance  is  per- 
mitted to  be  transacted  in  every  State  in  the 
Union,  there  is  not  in  every  case  an  exact  defini- 
tion of  this  feature  of  insurance.  Where  a 
definition  is  given  at  all,  it  runs  as  a  rule  closely 
to  the  definition  used  in  the  Laws  of  the  State  of 
New  York,  which  is  as  follows  : 

"  Insuring  any  one  against  loss  or  damage  result- 
"  ing  from  accident  to  or  injury  suffered  by  an  em- 
"  ploye  or  other  person  and  for  which  the  insured 
''  is  liable." 

It  will  be  seen  from  this  definition  that  it  was  the 
intention  to  provide  for  insurance,  not  only  of  em- 
ployers as  against  claims  made  by  employes,  but 
of  ''any  one  "  as  against  claims  made  by  employes 
or  any  other  persons,  so  that  under  the  feature  of 
Employers'  Liability  Insurance  nearly  all  of  the 
States  provide  for  insurance  against  liability  for 
personal  injuries  in  its  broadest  sense.  In  some  of 
the  States  there  has  been  an  effort  to  divide  Liabili- 
ty Insurance  into  its  component  parts  and  treat  each 
part  as  a  separate  branch  of  insurance,  but  up  to  this 
time  the  whole  field  covered  by  Liability  Insurance 
is  accepted  in  all  of  the  States  as  under  one  head. 


942 

The  hazards  other  than  Employers'  Liability 
oommonly  underwritten  by  companies  engaged  in 
this  line  are,  the  liability  of  a  manufacturer  or 
other  employer  of  labor  for  injuries  sustained  by 
persons  other  than  employes,  caused  by  the  oper- . 
ations  of  the  business  upon  which  the  insurance  is 
granted — this  is  called  Public  Liability  Insurance  ; 
the  liability  of  the  owner  of  horses  and  vehicles  for 
injuries  sustained  by  pedestrians  or  others  in  the 
public  ways — this  is  called  Teams  Insurance ;  the 
liability  of  the  owner  or  tenant  of  a  building  where 
elevators  are  used  for  passenger  or  freight  service, 
for  injuries  sustained  by  any  person  or  persons — 
this  is  called  Elevator  Insurance  ;  the  liability  of 
the  owner  or  lessee  of  any  building  (except  such  as 
may  be  used  by  the  assured  for  manufacturing 
purposes)  for  injuries  sustained  by  any  person  or 
persons  by  reason  of  defects  in  the  building  or  in 
the  ways  adjacent  thereto  or  by  reason  of  defective 
elevators  or  negligent  operation  thereof — this  par- 
takes of  the  nature  of  Employers'  Liability,  Public 
Liability  and  Elevator  Insurance  combined  and  is 
called  General  Liability  Insurance. 

The  insuring  of  the  liability  of  railroads  and  other 
common  carriers  has  been  essayed  by  some  compan- 
ies, but  those  who  have  undertaken  any  considerable 
volume  have  met  with  disaster,  while  those  who  have 
touched  it  experimentally  only,  have  withdrawn. 


943 

It  seems  to  have  been  demonstrated  that  the 
large  railroad  corporations  are  necessarily  so  equip- 
ped with  legal  and  adjusting  departments  for  the 
many  other  purposes  required  by  such  institutions, 
that  the  adjustment  and  defense  of  damage  claims 
and  suits  for  injuries  can  be  handled  at  less  ex- 
pense by  such  departments  than  the  amount  of  the 
"loading"  an  insurance  company  would  be  obliged 
to  add  to  the  average  loss.  The  railroad  company 
knows  its  average  of  loss  per  annum  and  is  not 
likely  under  the  circumstances  to  pay  an  annual 
premium  very  much  in  excess  of  such  sum. 

The  result  has  been,  therefore,  that  the  Railroad 
Liability  Insurance  written  in  the  past  has  been 
rated  inadequately  and  resulted  in  loss  to  the  un- 
derwriters. In  most  cases  the  comparatively  large 
premium,  even  at  a  low  rate,  was  the  attraction, 
but  there  is  nothing  in  the  liability  business  so  de 
ceptive  as  the  risks  carrying  large  premiums. 
Until  railroads  and  other  common  carriers  are  will- 
ing to  pay  a  rate  equivalent  to  the  net  cost,  plus 
the  usual  "loading"  on  average  business,  such  in- 
surance will  be  disastrous,  and,  as  it  is  reasonable 
to  believe  no  thoroughly  equipped  railroad  com- 
pany would  agree  to  pay  the  required  premium  on 
this  basis,  it  is  fair  perhaps  to  assume  that  the  in- 
suring of  the  liability  of  railroads  will  not  for  the 
future  be  a  factor  in  the  business. 


944 

The  hazards  heretofore  named  are  not  the  only- 
risks  taken  by  the  companies  under  this  head. 
There  are  other  directions  in  which  liability  in- 
surance is  tending.  Proprietors  of  theatres  and 
other  places  of  amusement  may  now  obtain  policies 
of  insurance  protecting  them  against  claims  for 
injuries  to  their  patrons  or  employes.  Owners  or 
tenants  of  private  dwellings  may  protect  them-, 
selves  against  the  dangers  of  icy  sidewalks,  open 
coal  chutes,  loose  shutters,  etc.  Owners  of  ships 
and  other  vessels,  tugs,  barges  and  scows  used  for 
freighting  purposes,  may  also  take  advantage  of 
liability  insurance.  And  so  also  in  connection  with 
the  insurance  of  steam  boilers  against  explosions, 
a  feature  of  liability  insurance  is  introduced. 
Steam  boiler  insurance  has  been  carried  on  for 
many  years  in  this  country  and  for  a  longer  period 
in  Europe,  but  it  is  only  of  late  years  that  the 
policies  have  been  so  extended  as  to  cover  the 
liability  of  the  owner  or  operator  of  the  boiler  for 
damages  by  reason  of  personal  injuries  in  conse- 
quence of  boiler  explosions. 

As  the  theory  becomes  better  understood  the 
possibilities  broaden.  New  lines  are  suggested  by 
actual  claims  that  arise  and  which  are  not  contem- 
plated by  any  policies  now  in  vogue,  and  it  may 
be  predicted  with  safety  that  the  principle  of  liabil- 
ity insurance  is  here  to  stay  in  one  shape  or  another, 


945 

but,  as  this  paper  endeavors  to  show,  surrounded 
by  such  difficulties  and  complications  always  that 
it  will  require  more  care  in  its  supervision  and 
management  than  any  other  branch  of  insurance, 
because  of  the  constantly  changing  factors  in  its 
underwriting  and  its  claim  adjustments. 

The  first  underwriters  of  Employers'  Liability 
Jnsurance  had  practically  no  basis  from  which  to 
work.  A  scale  of  rates  was  adopted,  based  largely 
upon  the  experience  of  accident  insurance  com- 
panies in  this  country.  This  scale  was  amended 
from  time  to  time  as  it  became  clear  that  a  risk 
hazardous  for  personal  accident  insurance  might  be 
non-hazardous  for  liability  insurance  and  vice 
versa.  For  a  number  of  years,  however,  this  origi- 
nal scale  of  rates  was  used  by  most  of  the  com- 
panies as  their  published  rate  schedule.  As  a 
matter  of  fact,  however,  until  three  years  ago  there 
was  no  actual  scale  of  rates,  each  company  accept- 
ing business  according  to  its  judgment,  which  in 
many  cases  proved  to  be  bad.  Within  the  last 
three  years,  however,  all  of  the  stock  companies 
in  the  country,  with  perhaps  one  exception,  be- 
came associated  for  the  purpose  of  determining 
the  actual  cost  of  insuring  the  many  different 
hazards  to  which  liability  insurance  is  applicable. 
It  was  deemed  to  be  wise  to  collate  the  past 
experience    of    all    companies — not    with    regard 


946 

to  the  amount  of  premiums  received,  but  with 
regard  to  the  actual  expenditure  for  losses  based 
on  the  wages  of  employes  or  otherwise,  as  the 
case  might  be — to  determine  the  actual  cost  in  loss 
payments  as  against  actual  exposure.  This  work 
has  been  and  is  still  going  on,  and  certain  impor- 
tant information  has  been  compiled  from  time  to 
time  resulting  in  many  changes  in  rates.  After* 
computing  the  actual  cost  of  any  given  class  of 
business,  it  is  a  comparatively  easy  matter  to  add 
a  sufficient '' loading  "  to  cover  expenses  and  ar- 
rive at  a  premium  rate  adequate  for  the  hazard,  as- 
suming that  the  conditions  will  remain  the  same  in 
the  future  as  in  the  past.  Difficulties,  however, 
have  presented  themselves  in  arriving  at  a  system 
of  rates  for  the  reason  that,  as  stated  elsewhere  in 
this  paper,  the  hazards  differ  materially  in  the  sev- 
eral States  by  reason  of  the  difference  in  laws  and  the 
difference  in  social  conditions.  The  attempt,  how- 
ever, is  a  step  in  the  right  direction,  and  while  the 
results  thus  far  have  not  been  entirely  satisfactory, 
there  is  no  doubt  that  rate  making  for  Employers' 
Liability  Insurance  is  being  gradually  reduced  to  a 
science.  In  almost  any  other  line  of  insurance  the 
scale  of  rates  once  established  in  this  way  would 
be  a  true  guide  for  the  future.  In  Liability  Insur- 
ance the  same  rule  does  not  apply,  because  a  scale 
established  and  found  to  be  correct  for  to-day 


947 

might  be  absolutely  incorrect  for  the  future.  The 
only  safe  rule  appears  to  be  the  making  of  a  scale 
by  past  experience  and  adding  to  it  the  necessary 
factor  of  safety  for  legislative  and  other  changes 
each  year. 

Environment  is  a  serious  factor  in  Liability  un- 
derwriting. [N'ot,  however,  from  the  same  cause  that 
governs  other  lines  of  insurance.  There  are  about 
as  many  people  injured  or  killed  in  a  given  occu- 
pation in  one  part  of  the  country  as  in  another,  but 
the  social  conditions  obtaining  in  the  different  sec- 
tions influence  matters  of  adjustment  and  of  suits 
to  a  greater  degree  perhaps  than  does  the  actual 
difference  in  statutory  provisions. 

In  the  comparatively  new  States  the  population 
is  not  as  homogeneous  as  in  the  older  and  more 
conservative  communities,  where  whole  families 
for  generations  have  been  employed  in  one  indus- 
try or  mill  or  factory.  Under  the  latter  conditions 
few  claims  are  made,  because  the  employer  is  likely 
to  be  in  close  touch  with  his  employes  and  his 
kindly  treatment  for  years  will  always  have  an  in- 
fluence on  his  workmen  and  tend  to  prevent  exces- 
sive claims  for  slight  injuries. 

On  the  other  hand,  in  localities  where  the  work- 
ing clashes  are  made  up  largely  of  immigrants  from 
foreign  countries,  or  in  any  event  is  of  a  cosmopol- 
itan character,   no  such  good  feeling  exists  or  is 


948 

lik'ely  to  exist,  and  when  claims  are  made  for  in- 
demnity on  account  of  injuries  sustained,  the  suras 
demanded  assume  proportions  which  if  paid  would 
be  a  menace  to  the  successful  continuance  of  a  bus- 
iness or  trade  where  mechanical  labor  is  a  chief 
factor  ;  and  in  such  communities  when  claims  are 
resisted  and  carried  into  the  courts  unreasonable 
verdicts  are  frequently  the  result,  presumably  be- 
cause the  juries  are  to  a  great  extent  in  sympathy 
with  the  working  people  as  against  corporations 
and  capitalists. 

Beyond  these  factors  in  environment  is  the 
variation  of  statistics  and  the  application  of 
the  law  in  the  several  States  of  the  country. 
In  some  States  the  fellow-servant  rule  is  strictly 
adhered  to,  while  in  others  this  rule  is  made 
elastic  and  decisions  are  usually  favorable  to 
the  injured  person ;  and  in  still  others  the  rule 
is  abrogated  altogether.  Promise  to  repair,  prox- 
imate cause,  contributory  negligence,  presumption 
of  negligence  and  many  other  legal  subtilities,  are 
also  widely  divergent  in  application,  to  such  an  ex- 
tent that  in  the  matter  of  underwriting  and  rate- 
making  all  these  conditions  must  be  considered  as 
having  a  direct  relationship  to  the  selection  of  risk. 

The  premium  charge  on  Employers'  Liability 
Insurance  is  based  on  the  aggregate  wages  of  all 
employes.     The  question,  therefore,  of  the  aver- 


I 


949 

age  rate  of  wages  has  a  direct  bearing  on  the 
hazard.  The  average  annual  wages  of  workmen  in 
the  United  States  is  shown  by  the  last  census 
to  be  something  less  than  $500.  The  use  of 
the  total  pay-roll  of  any  establishment  as  the 
basis  of  the  premium  charge  is  on  the  theory  that 
the  wage  expenditure  will  be  a  correct  indication 
of  the  number  of  employes  actually  engaged. 
Manifestly,  then,  the  actual  basis  of  the  premium 
is  the  number  of  employes  exposed  to  the  given 
hazard  for  one  year,  and  the  accepted  method  of 
computation  at  a  certain  rate  for  each  one  hundred 
dollars  of  wages  expended  is  on  the  assumption 
that  the  general  average  is  always  true. 

The  total  amount  of  pay-roll  during  the  term  of 
the  policy,  whether  it  be  for  a  year  or  a  longer  or 
shorter  period,  indicates  the  amount  of  the  pre- 
mium. A  pay-roll  of  $100,000  is  taken  to  be 
equivalent  to  the  exposure  of  200  employes  for  one 
year  or  400  employes  for  six  months  and  so  on. 

The  general  average  of  wages,  however,  does  not 
alwaj^s  obtain,  and  it  is  a  notable  fact  that  the 
nature  of  employment  and  the  character  of  workmen 
in  some  States  decrease  the  premium  per  capita, 
by  reason  of  the  low  rate  of  wages,  while  the 
hazard  is  no  wise  proportionately  improved  but^  on 
the  contrary,  is  likely  to  be  worse,  because  of  the 
lower  grade  of  intelligence  of  the  laborers. 


950 

It  is  a  fair  assumption  that  no  two  States  are  ex- 
actly alike  from  the  standpoint  of  underwriting, 
and  this  sets  up  another  difficulty  in  the  way  of 
establishing  any  rule  of  procedure  which  would  be 
mathematically  correct  for  the  whole  country. 
The  iniquitous  system  of  taxation  in  operation  in 
some  of  the  States  has  an  important  bearing  on  the 
cost  of  conducting  business  in  such  States,  and 
while  it  is  not  always  wise  for  insurance  corpora- 
tions to  discriminate  against  certain  sections  they 
cannot  be  expected  to  discriminate  in  favor  of 
places  where  additional  burdens  are  placed  upon 
them.  Each  State  at  least  must  be  rated  and  un- 
derwritten on  the  basis  of  the  existing  or  changing 
conditions  to  be  found  in  the  given  locality,  and, 
as  the  risks  are  necessarily  very  much  scattered, 
the  statistical  information  compiled  by  any  one 
company  is  not  of  great  value,  except  in  the  most 
populous  manufacturing  States.  The  ultimate  value 
therefore,  of  a  perfect  compilation  of  the  statistics 
of  all  the  companies  engaged  in  the  business  can- 
not be  over  estimated. 

In  the  matter  of  expenses,  it  may  be  interesting 
to  make  some  comparisons.  It  may  be  fairly  as- 
sumed that  the  commissions  paid  to  agents  and 
brokers  on  Liability  business  are  far  in  excess  of 
like  expense  on  other  lines,  where  the  premiums 
are  large. 


951 

The  commission  rate  may  very  properly  be  said 
to  be  in  the  hands  of  tlie  individual  company  to 
control,  but  it  will  be  well  understood  that  a  pre- 
cedent in  this  respect  having  been  once  established, 
it  is  practically  impossible  to  change  without  uni- 
formity of  action  on  the  part  of  all  companies  ;  and 
as  the  agencies  of  many  of  the  companies  are  and 
have  been  for  many  years  established  on  a  salary 
basis  equivalent  to  a  high  commission  rate,  there 
seems  to  be  no  likelihood  of  reform  in  this  direction 
in  the  near  future. 

Personal  Accident  Insurance  has  always  been 
subject  to  a  high  commission  rate,  and,  as  most  of 
the  companies  now  engaged  in  Liability  business 
established  their  field  agencies  originally  for  Per 
sonal  xiccident  Insurance,  there  seems  to  be  no 
doubt  that  the  high  Accident  commissions  influ- 
enced somewhat  the  rate  paid  for  commissions  on 
Liability  Insurance.  The  rates  of  commission  on 
the  latter  have  not,  however,  reached  the  average 
of  accident  business,  and  it  is  generally  agreed 
that  the  present  commission  on  Liability  Insurance 
is  excessive,  considering  the  size  of  the  premiums 
involved  and  considering  also  that  high  commis- 
sions on  large  premiums  open  the  way  to  the  re- 
bate evil  which  has  become  a  menace  to  other  lines 
of  insurance.  The  employment  also  of  salaried 
men  at  all  principal  points  for  purposes  of  survey 


952 

and  examination  of  risks  on  behalf  of  the  compan- 
ies is  no  inconsiderable  item  of  additional  expense. 

The  foregoing  refers  only  to  the  expense  of  secur- 
ing the  business.  The  expense  of  caring  for  the 
business  after  it  is  once  on  the  books  of  the  com- 
pany is  infinitely  greater  than  that  of  any  other 
line  of  insurance  known.  The  clerical  staff  must 
be  more  numerous  and  more  than  ordinarily  skilled 
in  the  business,  the  various  details  of  the  work  re- 
quiring constant  care  and  oversight.  The  loss  ad- 
justing department  must  be  supervised  by  men  of  the 
highest  order  of  ability  and  the  detail  work  in  this 
department  requires  more  skill  and  a  higher  grade 
of  men  than  would  be  requisite  in  many  other  lines 
of  insurance.  It  may  be  said  that  every  adjuster 
employed  by  the  company  must  have  a  considerable 
knowledge  of  the  law  and  at  the  same  time  jiossess 
the  qualifications  of  a  level  headed  business  man. 

It  may  be  stated  with  some  degree  of  accuracy 
that  for  every  thousand  policies  issued  there  will 
be  in  the  neighborhood  of  one  thousand  notices  of 
accident  annually.  Under  some  policies  there  will, 
of  course,  be  more  than  under  others,  but  consider- 
ing that  many  of  the  policies  cover  work  involving 
the  employment  of  large  numbers  of  men  it  is  not 
surprising  that  few  except  the  very  small  risks 
escape  without  any  accidents. 

Each  claim  that  arises  must  be  carefully  investi- 


953 


gated  and  is  likely  to  require  many  visits  and  con- 
tinued expense.  The  claim  is  not  against  the  com- 
pany, but  it  is  a  demand  made  on  the  policy-holder 
to  whom  the  company  stands  in  the  relationship  of 
counsel.  It  is  not,  therefore,  a  matter  of  ascertain- 
ing the  amount  of  the  claim  and  effecting  a  settle- 
ment for  the  company,  but  an  examination  of  all 
the  facts  with  a  view  of  setting  up  a  proper  defense 
for  the  assured  in  the  event  of  an  action  at  law,  or 
of  effecting  a  compromise  on  behalf  of  the  assured 
should  it  appear  that  the  injuries  were  caused  by 
his  negligence.  This  necessarily  often  introduces 
the  services  of  lawyers  into  the  cases,  and,  as  law- 
yers are  probably  the  best  paid  professional  men  in 
this- country,  it  may  be  truthfully  asserted  that  to 
the  lawer  is  attributable  a  large  part  of  the  expense 
ratio  of  Liability  Insurance  Companies. 

Expert  mechanical  inspections  also  add  to  the 
expense  of  the  business.  Each  company  must 
maintain  a  bureau  for  the  periodical  inspection  of 
risks.  A  staff  of  inspectors,  skilled  mechanics, 
must  be  employed,  and  the  assured  must  be 
afforded  the  protection  of  this  service  in  addition 
to  the  indemnity  provided  by  the  policy. 

It  is  estimated  that  at  the  present  time  about 
$500,000  is  paid  out  for  mechanical  inspections  by 
Liability  Insurance  Companies  annually,  and  for 
the  most  part  this  amount  is  expended  for  steam 


954 

boiler  and  elevator  inspections.  The  inspection 
feature  in  these  two  branches  of  insurance  is  of 
paramount  importance.  While  it  cannot  be  shown 
definitely  in  how  many  instances  inspections  have 
prevented  accidents,  it  is  nevertheless  true  that  in 
many  cases  serious  defects  have  been  discovered 
and  remedied.  Certain  it  is  that  inspections  at 
stated  intervals  by  practical  men  who  are  trained 
mechanical  engineers  have  a  desirable  effect  upon 
employer  and  employe  and  tend  to  good  order  and 
method  where  otherwise  there  would  exist  every 
opportunity  for  accident. 

While  the  larger  part  of  the  expense  for  inspec- 
tions is  chargeable  to  the  two  branches  mentioned, 
general  inspections  are  being  extended  to  all -im- 
portant risks,  and  the  expense  of  this  department 
of  the  business  is  likely  to  be  increased  by  the 
addition  of  new  and  untried  hazards.  The  original 
theory  of  Liability  Insurance  was  the  protection  of 
the  assured  against  heavy  financial  loss.  The 
practical  administration  of  it,  however,  contem- 
plates the  payment  of  many  small  losses  which 
come  within  the  limits  stipulated  in  the  policy.  If 
it  were  possible  with  safety  to  the  insurer  to  elim- 
inate the  small  losses  and  pay  only  those  beyond  a 
certain  stated  amount,  the  expense  ratio  might  be 
very  much  reduced,  but  this  does  not  appear  to  be 
practicable.     Small  losses  left  to  the  assured  to 


955 

adjust  would  grow  into  large  ones,  and  the  only 
safety,  therefore,  of  the  company  insuring  would 
be  the  handling  of  every  claim,  even  if  the  assured 
paid  the  damages  within  certain  limitations.  By 
this  method  the  companies'  losses  would  be  reduced, 
but  the  actual  amount  paid  out  for  expenses  would 
remain  the  same,  while  on  the  other  hand,  the  pre- 
miums being  proportionately  reduced  by  reason  of 
the  lessened  hazard  carried  by  the  companies,  the 
expense  ratio  would  be  materially  increased. 

Digressing  for  the  moment,  let  us  examine  the 
method  of  computing  the  re-insurance  reserve  of 
Liability  Companies.  The  requirements  for  a  re- 
insurance reserve  for  Liability  Companies  do  not 
differ  materially  in  the  several  States  where  there 
is  any  requirement  at  all  for  such  companies.  The 
rule  is  50^  of  premiums  on  polices  to  run  one  year 
or  less,  and  on  policies  to  run  more  than  one  year 
50^  of  the  premium  chargeable  for  the  first  year 
and  the  whole  of  the  balance  of  the  premium. 
This  reserve  must  be  computed  on  the  gross  pre- 
mium named  in  the  policy,  and  in  actual  practice 
works  out  as  follows  : 


I 


1  year  or 

less. 

50^ 

or  1/2 

2  years, 

15% 

''   3/4 

3  years, 

83  1/3^ 

"  516 

4  years. 

87  1/2^ 

"   7/8 

5  years, 

90^ 

''  9/10 

956 

The  theory  of  a  re-insurance  reserve  is  protec- 
tion to  policy-holders  in  the  event  of  insolvency  of 
a  company  or  its  withdrawal  from  business  for  any 
other  reason.  In  either  case,  the  reserve  should  be 
sufficient  to  carry  all  policies  to  expiration.  On 
the  other  hand,  a  company  might  be  called  upon 
by  individual  policy-holders  for  the  cancellation 
of  all  policies  in  force,  or  it  might  desire  to  re- 
insure all  of  its  business  in  some  other  company. 
In  either  of  the  latter  cases  the  reserve  should  fur- 
nish the  necessary  amount  to  pay  return  premiums 
to  the  assured  or  the  re-insurance  premiums  to  the 
re-insuring  company. 

In  establishing  this  fund,  however,  no  account  is 
taken  of  the  cost  of  securing  the  business,  an  ex- 
pense which  has  already  been  met.  Assuming  that 
the  business  of  any  one  year  will  average  as  of 
about  July  1st,  it  is  clear  that  at  the  end  of  such 
year  six  months'  premium  has  been  earned ;  but 
out  of  this  six  months'  earned  'premium  there  has 
been  paid,  not  only  the  losses  accruing  during  such 
period  of  six  months,  but  also  the  expenses  inci- 
dent to  the  acquisition  of  such  business.  It  may 
be  safely  assumed  that  40^  of  the  gross  premiums 
is  a  low  estimate  of  the  expense  of  obtaining  busi- 
ness for  a  casualty  company,  because  the  average 
of  all  such  companies  for  a  period  covering  the  last 
ten  years  is  much  in  excess  of  this  percentage. 


957 

Taking  this  percentage  for  a  basis,  the  amount  re- 
quired to  provide  a  fund  for  carrying  all  policies 
to  expiration  or  for  the  unearned  six  months 
would  be  the  gross  unearned  premium  of  50^ 
less  40^,  or  30^  of  the  amount  of  premium  in 
force. 

If  a  company  becomes  insolvent,  it  may  re-insure 
its  policies  the  same  as  a  solvent  company,  pro- 
vided it  has  a  proper  reserve.  If  a  company  de- 
sires to  re-insure  for  any  other  reason,  it  may  also 
do  so.  In  either  event  a  re-insurance  may  be 
effected  for  such  sum  as  may  be  agreed  upon  be- 
tween the  re-insurer  and  the  re-insured  as  being 
the  actual  net  unearned  premium,  i.  e.,  the  gross 
unearned  less  the  average  cost  of  securing  the 
business.  Computing  this  average  cost  to  be  40^, 
as  estimated  above,  the  amount  required  for  re- 
insurance would  be  the  gross  unearned  premiums 
(or  50%)  less  40%  (cost  of  obtaining  business),  or 
30^  of  the  amount  of  premiums  in  force. 
•  If  a  company  should  be  called  upon  by  its 
policy-holders  to  cancel  all  policies  in  force,  the 
amount  required  to  meet  such  a  call  would  be  com- 
puted by  the  customary  short  rate  table. 

This  table  provides  a  charge  of  70^  for  six 
months'  earned  premium  ;  the  amount  payable  for 
return  premiums  would  therefore  be  30^  of  the 
premium  in  force. 


958 

The    deductions    from    the    foregoing    are     as 
follows  : — 


(Net  reserve  necessary.) 


To  carry  to  expiration, 

To  re-insure, 

To  cancel  short  rate,   \ 


Required  by  law,  50% 

In  making  this  estimate,  premiums  on  policies 
to  run  one  year  or  less  only  are  considered.  On 
policies  running  more  than  one  year  it  will  be 
readily  seen  that  the  burden  is  greater  according 
to  the  number  of  years  of  the  policy  term. 

The  arbitrary  requirement  of  a  reserve  equal  to 
the  full  gross  unearned  premium  would  seem  to  be 
excessive  for  casualty  companies  and  is  certainly  a 
burdensome  provision  of  insurance  regulations, 
particularly  during  the  earlier  period  of  a  com- 
pany's business,  when  the  reserve  required  by  law 
is  so  great  as  to  leave  a  very  narrow  margin  for  the 
transaction  of  current  operations. 

The  reserve  on  life  insurance  policies,  being 
computed  on  the  net  premium,  is  easily  arrived  at, 
because  there  is  a  well  defined  rule  for  determining 
the  net  cost.  In  casualty  insurance,  however,  the 
net  cost  has  not  yet  been  reduced  to  a  science,  and 
until  such  time  as  the  experience  of  all  companies 
is  collated  and  the  proper  rule  established  it  will 


959 

be  impossible  to  compute  the  reserve  on  casualty 
policies  by  any  such  method  as  is  in  use  by  life  in- 
surance companies.  It  is  true  also,  as  shown  else- 
where in  this  paper,  that  there  are  difficulties  in 
the  way  of  arriving  at  any  true  rule  for  establish- 
ing the  net  cost  for  Liability  Insurance,  on  account 
of  the  changes  that  are  constantly  occurring  by 
reason  of  new  legal  decisions  and  the  enactment  of 
new  statutes.  It  is  therefore  probable  that  the 
only  available  means  of  computing  the  reserve  on 
net  cost  is  to  arrive  at  such  net  cost  by  taking  from 
the  premium  the  approximate  amount  of  expenses. 

It  may  be  added  here  that  this  statement  is 
made  without  any  desire  to  advocate  a  reduction 
of  proper  reserves  ;  but  a  re-insurance  reserve  has 
no  relationship  whatever  to  earned  premiums,  and 
if  the  earned  premium  of  six  months  less  all  ex- 
penses of  securing  business  is  deemed  sufficient  to 
carry  the  first  six  months,  then  certainly  the  un- 
earned premium  of  the  remaining  six  months,  less 
one-half  of  such  expense  should  be  an  adequate 
provision  for  the  second  six  months. 

If  such  a  reserve  be  not  sufficient,  then  the  diffi- 
culty lies  with  the  rate,  and  it  is  there  the  adjust- 
ment should  be  made.  This  question  of  rate  mak- 
ing is  now  being  carefully  studied  by  all  the  com- 
panies having  any  experience  to  guide  them,  and 
many  changes  have  already  been  made,  having  al- 


960 

ways  in  view  the  establisliment  of  rates  adequate 
to  the  various  hazards  involved.  It  is  to  be  hoped 
that  the  restrictions  placed  upon  fire  insurance 
companies  in  some  States,  preventing  co-operation 
in  establishing  fair  and  equitable  rates,  will  not  be 
applied  to  the  casualty  companies. 

The  adjusting  of  losses  under  liability  policies  is 
admitted  to  be  far  more  difficult  than  adjustments 
under  any  other  form  of  insurance.  As  an  ex- 
ample of  this,  almost  any  case  may  be  selected. 
The  assured  notifies  the  company  that  one  of  his 
employes  has  met  with  an  injury.  It  is  usual  for 
the  company  to  furnish  the  employer  with  printed 
forms  for  this  purpose.  The  adjusting  department 
of  the  company  on  examination  of  the  report  may 
and  often  does  find  a  lack  of  detailed  information 
concerning  occupation,  rate  of  wages,  place  of 
accident,  particulars  of  accident  and  description  of 
injury.  In  very  few  cases  is  the  information  given 
sufficient  to  determine  whether  or  not  the  em- 
ployer is  liable  by  reason  of  negligence.  It  is 
therefore  necessary  for  the  company  to  send  an 
investigator  to  make  a  personal  inquiry  into  the 
facts.  The  investigator  gathers  all  information 
obtainable  from  the  employer  and  also  from  wit- 
nesses, and  makes  his  report  to  the  company. 
From  this  report  the  company  may  be  able  to  base 
an  opinion  as  to  the  liability  of  its  assured  for  the 


961 

accident.  Frequently,  however,  a  single  accident 
will  require  numerous  visits  to  the  scene  of  its 
occurrence  before  all  the  facts  can  be  brought  out. 

When  the  company  finds  there  is  no  liability  in 
the  case  against  the  assured,  he  is  so  notified  and 
the  injured  person  is  not  approached  at  all.  The 
papers  in  the  case  are  carefully  filed,  and  all  the  in- 
formation is  at  hand  in  the  event  of  a  future  claim 
on  account  of  the  given  accident. 

If,  on  the  other  hand,  it  appears  to  be  a  case  of 
negligence,  and  a  claim  is  likely  to  be  made,  nego- 
tiations are  at  once  begun  for  an  adjustment  as 
between  the  employer  and  the  employe,  the  com- 
pany's representative  acting  as  the  representative 
of  the  employer. 

Then  the  actual  work  of  adjusting  begins.  Be- 
fore an  actual  settlement  is  accomplished  and  a 
release  given,  one  or  more  representatives  of  the 
company  have  made  visit  after  visit  to  the  em- 
ployer and  the  injured  person  ;  witnesses  have 
been  examined  and  their  sworn  statements  taken  ; 
it  has  been  necessary,  perhaps,  to  employ  a  phy- 
sician to  make  a  physical  examination  of  the 
injured  person,  and  in  the  meantime  the  case  may 
have  been  placed  in  the  hands  of  a  lawyer  by  the 
claimant.  A  case  which  looked  trivial  in  the 
beginning  may  be  the  occasion  of  more  negotiation 
and  expense  in  adjustment  than  a  really  meritorious 


962 

claim.  Ignorant  persons  guided  by  the  pernicious 
advice  of  unscrupulous  lawyers  will  frequently 
press  claims  in  which  there  is  no  merit  whatever. 

Within  the  past  few  years,  and  particularly 
since  the  advent  of  Employers'  Liability  Insur- 
ance, our  court  calendars  have  been  filled  with 
accident  cases  hunted  up  by  a  species  of  lawyer 
known  as  the  ambulance  runner.  These  men 
are  a  great  menace  to  the  public  and  to  the 
Employers'  Liability  Companies.  They  keep 
themselves  well  posted  by  frequent  examina- 
tions of  police  reports  and  otherwise  as  to  every 
accident  that  happens,  and  frequently  a  person 
who  has  suffered  a  trifling  injury  will  be  visited 
by  several  such  lawyers  in  the  endeavor  to 
magnify  the  injury  into  important  proportions 
and  encourage  the  making  of  an  exorbitant  claim 
Reputable  lawyers  do  not  lend  themselves  to  such 
tactics.  It  makes  little  difference  to  the  ambu- 
lance runner  whether  his  client  has  a  case  or  not,  so 
long  as  he  is  given  an  opportunity  to  bring  suit 
against  someone,  depending  upon  the  probability 
that  the  person  sued  would  in  any  event  be  willing 
to  pay  him  a  small  sum  rather  than  pay  some  other 
lawyer  a  large  fee  to  defend.  He  is  looking  out  for 
himself  rather  than  for  his  client  in  nearly  every 
case,  and  naturally  sees  in  the  Liability  Insurance 
Company  an  opportunity  for  piracy  of  this  nature 


1 


963 

which  did  not  exist  before  such  insurance  became 
an  established  fact  in  this  country.  It  does  not 
take  long,  however,  in  any  locality,  to  ascertain 
which  of  the  lawyers  have  this  versatile  ambulance 
chasing  propensity  and  they  receive  scant  courtesy 
from  the  companies  when  discovered. 

Under  these  circumstances  it  is  obvious  that  the 
estimating  of  ultimate  cost  of  outstanding  or  re- 
sisted claims  is  altogether  a  matter  of  opinion,  and 
naturally  opinions  differ  on  this  subject.  Some 
companies,  taking  past  experience  as  a  basis,  as- 
sume that  all  notices  or  reports  of  injury  received 
will  cost  on  the  average  a  certain  sum  in  settlement, 
that  all  suits  brought  will  average  in  cost  of  settle- 
ment a  certain  stated  amount,  and  cases  appealed 
from  lower  Courts  will  cost  a  proportionately 
higher  amount.  Other  companies  estimate  each 
case  according  to  the  circumstances  surrounding  it. 
It  is  difficult  to  say  which  comes  nearer  to  being 
right. 

It  appears  to  be  true  that  in  the  early  years  of 
the  business  in  this  country  most  of  the  risks  writ- 
ten were  those  that  required  little  or  no  solicita- 
tion by  the  companies,  because  the  employers 
recognized  the  hazardous  nature  of  their  work  and 
gladly  availed  themselves  of  the  opportunity  to  in- 
sure. 

Employers,  however,  did  not  recognize  altogether 


964 

the  necessity  of  reporting  every  injury.  Those 
that  were  considered  trifling  cases  at  the  time  of 
accident  were  not  reported,  but  such  as  were  re- 
ported proved  expensive  to  the  underwriters,  be- 
cause of  the  hazardous  nature  of  the  business.  As 
time  went  by  it  was  found  frequently  that  a  case 
which  appeared  to  be  a  trivial  accident  at  the  out- 
set grew  in  proportions,  and  claims  were  often 
made  in  cases  where  it  was  supposed  by  the  em- 
ployer that  the  injured  employe  had  no  intention 
of  seeking  indemnity.  As  the  volume  of  business 
increased,  too,  and  employers  became  more  familiar 
with  the  insurance  that  was  ofPered  by  the  com- 
panies, its  adoption  became  more  general  and  per- 
sons who  theretofore  had  not  taken  advantage  of  it 
applied  for  policies  In  this  way  through  the  large 
staffs  of  solicitors  employed  by  the  various  com- 
panies and  the  consequent  general  education  of  em- 
ployers to  a  knowledge  of  the  value  of  insurance, 
the  less  hazardous  risks  became  insured  and  the 
assured  became  more  careful  in  reporting  accidents, 
so  that  at  this  time  it  is  probable  that  the  average 
number  of  notices  of  injury  per  annum  is  greater 
for  the  same  number  of  workmen  than  at  the  incep- 
tion of  this  branch  of  insurance.  Many  establish- 
ments now  report  injuries  of  the  most  trivial  nature, 
which,  if  estimated  on  the  basis  of  the  experience  of 
earlier  years,  would  indicate  a  premium  rate  far 


965 

in  advance  of  that  actually  needed,  so  that  at  the 
present  time  there  does  not  appear  to  be  any  sound 
basis  for  estimating  the  actual  average  cost  of  each 
notice.  Such  a  figure  may  be  reached  when  the 
business  has  run  over  a  term  of  years  sufficient  to 
base  such  an  average  on  an  actual  earned  premium 
of  large  amount ;  but  again  in  this  connection  ap- 
pears another  difficulty.  An  employer  takes  out  a 
policy  in  a  State  where  the  statute  of  limitations 
is  three  years.  The  company  must  protect  him  for 
any  loss  occurring  during  the  life  of  his  policy,  for 
which  claim  is  made  upon  him  during  the  term  of 
the  statute,  provided,  of  course,  he  has  given  the 
company  notice  of  such  an  accident  at  the  time  of 
its  occurrence.  The  statute  of  limitations  varies  in 
the  different  States,  from  one  year  in  some  States 
to  seven  years  in  others,  so  th^t  it  may  be  said  that 
the  premium  of  any  given  year  cannot  be  fully 
earned  until  the  time  of  the  statute  of  limitations 
has  entirely  elapsed.  To  arrive,  therefore,  at  an 
actual  basis  for  any  given  period  of  years,  the  time 
of  the  statute  of  limitations  must  have  expired  on 
all  risks  of  the  last  year  of  such  period  in  every 
State  where  the  business  is  conducted.  There  is 
little  doubt  that  the  best  method  of  estimating  the 
value  of  outstanding  losses  is  to  compute  the  aver- 
age cost  per  notice,  the  average  cost  per  suit  and 
the   average   cost   for   each   appeal,  provided  this 


966 

average  cost  can  be  correctly  determined.  Con- 
sidering, however,  the  constant  changes  in  laws, 
considering  the  inclination  of  legislators  in  the 
direction  of  providing  workmen  with  indemnity 
for  accidental  injuries,  and  considering  the  slow 
but  sure  progression  of  public  sentiment  in  favor 
of  laws  such  as  have  been  enacted  in  many  of  the 
countries  of  Europe  for  the  protection  of  the  work- 
ing classes,  it  would  seem  almost  impossible  ever 
to  arrive  at  a  true  rule,  because  every  year  would 
be  likely  to  change  the  conditions.  Under  these 
circumstances,  it  appears  as  if  the  estimating  of 
each  case  on  its  merits  is  best,  for  the  reason  that 
when  a  case  is  estimated  the  prevailing  conditions 
are  known  and  are  taken  into  consideration  and 
the  company  is  more  likely  to  adopt  a  factor  of 
safety  for  each  year's  business  than  if  it  depended 
on  a  complete  change  of  its  average  estimate  each 
year. 

Opinions  differ  widely  as  to  the  wisdom  of  litiga- 
tion by  companies  engaged  in  liability  insurance. 
It  has  been  said  on  the  one  hand  that  the  com- 
pany's advice  to  the  assured  should  be  exactly  that 
of  the  assured' s  counsel  under  similar  circum- 
stances. On  the  other  hand,  it  will  be  admitted 
that  the  counsel  of  the  assured  in  advising  his 
client,  is  not  by  any  means  in  the  same  position  as 
the  insurance  company  with  the  function  of  loss 


967 

payer  as  well  as  adviser.  It  is  reasonable  to  sup- 
pose, of  course,  that  the  lawyer  will  give  the  best 
advice  that  his  judgment  dictates.  It  is  clear  also 
that  the  insurance  company  should  give  the  best 
advice,  not  only  by  its  judgment,  but  by  its  actual 
experience  in  litigation,  because  it  has  to  pay  the 
judgment  for  damages  if  one  is  obtained  by  the 
injured  party.  The  business  in  this  country 
has  not  yet  reached  that  stage  where  it 
can  be  said  with  any  degree  of  certainty 
which  is  the  better  policy.  It  is  perhaps 
fair  to  assume,  however,  that  the  more  acceptable 
method  so  far  as  the  assured  is  concerned  is  a 
prompt  settlement  and  a  full  release  ;  and,  under 
ordinary  circumstances,  settlements  can  be  made 
to  better  advantage  if  negotiated  at  once  than  if 
allowed  to  drift  into  the  hands  of  unscrupulous 
attorneys  whose  exorbitant  fees  immediately 
swell  the  amount  demanded.  There  is  good 
reason  to  believe  that  some  sort  of  a  payment  for 
every  claim  that  arises  would  result  in  establish- 
ing dangerous  precedents  in  large  establishments, 
but,  it  is  contended,  if  every  claim  is  settled  and 
put  aside  at  once  there  is  not  likely  to  be  danger 
of  claims  accumulating  later  on.  There  seems  to 
be  no  doubt,  therefore,  that  the  most  acceptable 
plan  to  the  assured  is  immediate  adjustment  when 
a  claim  arises,  and  there  seems  to  be  no  doubt  also 


968 

that  with  care  and  good  judgment  in  settlements 
this  method  would  be  the  best  one  for  the  com- 
panies  to  follow.     As  has    already  been  stated, 
however,  there  is  a  wide  divergence  of  opinion  on 
this  subject,  some  insurers  believing  that  where  a 
claim  is  not  meritorious,  it  should  be  fought  to  the 
bitter  end,  while  others  contend  that  even  in  such 
cases,  if  a  reasonable  settlement  can  be  effected  for 
a  sum  not  far  in  excess  of  the  cost  of  litigation,  the 
result  as  a  whole  will  be  less  expensive  for  the 
company  than  any  system  of  adjudication  through 
the  courts.     Time  alone  will  prove  which  of  the 
methods  outlined  above  is  correct ;   but  thus  far 
those  insurers  who  have  undertaken  by  prompt 
action  to  clear  away  liability  have  shown  the  best 
results,  while  those  who  have  built  up  a  large  out- 
standing liability  by  reason  of  suits  against  policy- 
holders, are  as  far  away  as  ever  from  the  final  de- 
termination.     This   proposition    does    not    apply 
equally  to  all  classes  of  liability  business.      In 
pure   Employers'  Liability  Insurance  settlements 
are  more  easily  made  than  in  some  other  branches 
where  the  factor  of  public  liability  enters  ;  but  as 
an  offset  to  this,  while  public  liability  cases  fre- 
quently require  liberal  adjustments,   so  do  they 
often  result   in  large  verdicts  if  allowed    to  go 
to  trial. 
From    a  paper  read    by  the    Hon.   George  F. 


969 

Seward,  of  New  York,  before  the  Insurance  Con- 
gress of  the  World's  Columbian  Exposition,  in 
June,  1893,  the  following  extract  is  taken  : 

"Few  employers  are  acquainted  with  the  law 
"  of  negligence.  When  a  case  of  injury  arises 
* '  they  call  in  their  own  counsel.  Every  man  who 
*'has  had  occasion  to  employ  lawyers  knows  a 
*'  tendency  which  exists  among  them.  Their  busi- 
**  ness  is  to  conduct  litigations.  To  avoid  difficul- 
"  ties  and  to  prevent  litigation  is  not  the  way  for 
"  them  to  build  up  their  incomes.  I  know  very  well 
' '  that  there  are  exceptions  to  this  rule.  But  even 
"  if  the  lawyer  is  well  disposed,  his  advice  to  his 
''  client  in  given  cases  is  by  no  means  likely  to  be 
"  so  well  grounded  in  knowledge  of  the  law  as 
"  would  be  the  advice  of  the  counsel  of  an  insur 
'*  ance  company  in  the  same  case.  Few  lawyers  in 
**  general  practice  have,  or  can  be  expected  to  have, 
"  broad  experience  in  negligence  cases.  They  are, 
*'  therefore,  far  away  more  likely  to  err  than  the 
"trained  men  of  companies,  and  this  leads  to  liti- 
"gation." 

These  conditions  have  not  changed  in  five  years. 
The  Liability  Insurance  Companies  are  and 
always  will  be  able  to  handle  the  adjustment,  de- 
fense and  settlement  better  than  individual 
lawyers,  for  just  the  reasons  pointed  out  by  Mr. 
Seward. 


970 


It  may  be  well  to  point  out  one  danger  which  is 
likely  to  be  overlooked  by  beginners  who  have  had 
no  considerable  experience  in  the  business. 

The  result  of  the  first  year's  operations  at  the 
prevailing  rates  of  to-day  is  likely  to  indicate  so 
handsome  a  profit  that  the  inexperienced  mana- 
ger may  be  misled  into  the  belief  that  the  rates 
are  excessive.  There  is  probably  no  other  line  of 
insurance  so  deceptive  in  this  respect.  The  final 
results  of  the  first  year's  business  will  not  be 
known  until  the  time  fixed  in  the  statute  of  limi- 
tations has  expired,  and  if  business  is  transacted 
in  States  where  the  statute  extends  six  or  seven 
years  it  will  be  seen  over  how  long  a  period  the 
business  must  run  before  the  actual  loss  may  be 
determined.  Then,  too,  in  case  of  accident  to  a 
minor,  suit  may  be  brought  after  he  reaches  his 
majority,  and  the  company  must  protect  the  em- 
ployer if  he  held  a  policy  at  the  time  of  the  acci- 
dent and  fulfilled  all  its  conditions. 

It  is  estimated  that  the  loss  shown  as  having 
been  paid  on  a  given  year's  business  at  the  end  of 
the  second  year  will  be  at  least  doubled  before  a 
final  determination  of  the  business  of  that  year. 

Notwithstanding  all  the  difficulties  of  conduct- 
ing Liability  Insurance,  it  is  believed  that  it  has 
become  an  established  factor  in  the  operation  of 
business  in  this  country  and  that  its  scope  will 


971 

broaden  as   time  goes  by.     Legislation  will  un- 
doubtedly affect  it  from  time  to  time,  but  the 
principle  will  still  remain,  whatever  the  local  con- 
ditions, and  these  conditions  will  tend  rather  to 
regulate  underwriting  than  to  discredit  the  busi 
ness. 


I 


CORPORATE  SURETYSHIP. 


EDWIN   WARFIELD: 

npHE-OUGH  your  great  courtesy  and  considera- 
-^  tion  I  am  afforded  this  opportunity  of  meet- 
ing the  Insurance  Commissioners  of  the  many 
States  of  our  great  Union  in  national  convention 
assembled.  It  is  a  privilege  and  an  honor  that  I 
appreciate. 

I  have  always  wanted  an  oppoi'tunity  to  know 
the  Insurance  Commissioners  of  the  various  States. 
In  my  estimation,  no  body  of  State  officers  ever 
assembled  in  this  country  who  supervise  greater 
financial  and  public  interests  than  you,  gentlemen, 
who  compose  this  convention. 

When  I  consider  the  millions  upon  millions  of 
assets  of  the  companies  doing  business  in  your 
respective  States,  under  your  immediate  super- 
vision, and  the  thousands  of  individuals  and  cor- 
porations interested  directly  and  indirectly  in  the 
stability  and  solvency  of  those  institutions,  I  am 
greatly  impressed  by  the  magnitude  of  the  respon- 


973 

sibilities  resting  upon  you,  but  since  I  have  met 
you  face  to  face  I  am  assured  that  those  responsi- 
bilities are  well  placed,  and  that  your  supervision 
is  intelligent  and  wise,  securing  for  your  respective 
constituents  the  very  best  results  and  protection. 

When  invited  to  come  here,  I  was  requested  to 
prepare  a  paper  upon  ' '  Corporate  Suretyship. ' '  I 
replied  that  I  should  be  very  glad  to  come  and 
talk  informally  upon  the  subject,  and  I  can  prom- 
ise you  nothing  more  than  an  off-hand  address. 

Surety  companies  have  been  in  existence  but  a 
few  years.  They  have  not  a  record  of  150  years 
like  the  fire  insurance  companies  or  a  record  of  100 
years  like  the  life  insurance  companies  upon  which 
to  predicate  a  jjaper.  In  1890  I  had  the  honor  of 
incorporating  the  second  company  doing  a  purely 
surety  business  in  the  United  States.  Prior  to  that 
time  the  Guarantee  Company  of  North  America, 
a  Canadian  Corporation,  was  transacting  business 
here,  confining  its  lines  to  guaranteeing  the  fidelity 
of  employes  of  banks  and  other  corporations.  In 
1884,  Mr.  Lyman,  who  had  been  connected  with 
the  Post  OflBlce  Department  at  Washington,  origi- 
nated and  had  incorporated  the  American  Surety 
Company  of  New  York,  which  company  began 
business  that  year.  That  company  broadened  its 
sphere  of  usefulness  by  writing  bonds  for  con- 
tractors and  those  in  judicial  proceedings,  in  ad- 


974 

dition  to  those  guaranteeing  the  honesty  of  em- 
ployes in  banks  and  other  institutions. 

I  believed  that  corporate  suretyship  was  in  its 
infancy  and  that  there  was  a  great  future  before  it, 
especially  in  the  field  then  undeveloped,  which  was 
that  of  insuring  the  honesty  of  public  officials. 
My  training  had  been  such  as  to  teach  me  that 
public  officials  were  as  a  class  just  as  honest  as 
bank  officials  or  employes  of  railroads  and  other 
institutions,  so  I  determined  to  make  a  specialty 
of  becoming  surety  on  the  bonds  of  officers  and 
employes  of  the  United  States  and  of  the  various 
States  and  municipalities.     The  companies  which 
were  then  in  existence  had  steered  clear  of  this 
business.     They  held  that  it  was  extra  hazardous, 
taking  the  ground  that  public  officials — such  as 
insurance  commissioners,  for  instance — were  not  as 
honest  as  bank  and  other  officials  and  that  the  per- 
centage of  wrongdoing  and  dishonesty  was  greater 
in  public  officials  than  those  occupying  different 
positions.     I  took  issue  with  them  and  determined 
to  develop  that  line  of  business.     The  undertaking 
was  not  an  easy  one  because  I  was  confronted  with 
the  fact  that  the  laws  of  the  United  States  did  not 
permit  the  approval  of  any  but  personal  sureties, 
and  that  but  few  States  had  authorized  the  accept- 
ance of  corporations  upon  bonds  of  its  officials  or  in 
judicial  proceedings,  thus  the  field  of  my  special 


975 

line  was  very  limited,  and  I  realized  that  I  had 
before  me  a  campaign  of  education.  This  I  entered 
upon  with  enthusiasm,  because  I  knew  what  I  advo- 
cated was  for  the  good  of  the  people. 

In  1889,  President  Cleveland,  who  had  been  kind 
enough  to  give  me  a  j)nblic  office,  was  defeated, 
and  it  behooved  me  to  decide  whether  I  would 
remain  in  Baltimore  or  go  back  to  my  county  and 
practice  law  and  edit  a  country  newspaper.  I  de- 
cided to  stay  in  the  city,  and  that  I  would  have 
incorporated  a  guarantee  company.  I  had  given 
the  matter  much  consideration,  and  I  felt  that 
something  should  be  done  to  protect  the  public 
interests  and  to  relieve  men  of  means  of  the  dis- 
agreeable necessity  of  saying  "no"  to  people  who 
wanted  sureties.  Just  at  that  time,  to  emphasize 
the  necessity  of  corporate  suretyship,  the  treasurer 
of  the  State  of  Maryland  defaulted.  He  had  been 
a  member  of  Congress  and  had  stood  high  in  the 
councils  of  his  party  in  the  State  of  Maryland.  His 
social  relations  were  the  best,  but  owing  to  the  lack 
of  proper  restraints  and  protection  he  fell.  He 
did  not  steal  money,  but  the  negotiable  securities 
of  the  State  were  used  by  him  as  collateral.  These 
securities  were  accessible  to  him  individually,  and 
there  were  no  safeguards,  such  as  joint  custody, 
thrown  around  them  to  prevent  him  from  using 
same  as  he  desired. 


976 

I  went  to  the  Legislature  and  asked  for  a  charter, 
because  our  general  incorporation  act  did  not  give 
the  power  to  the  courts  to  incorporate  guarantee 
companies.  Now,  gentlemen,  I  believe  the  history 
of  the  Fidelity  and  Deposit  Company  of  Maryland, 
of  which  I  have  the  honor  to  be  the  president,  is 
the  history  of  the  development  of  the  surety  busi- 
ness in  this  country.  So  I  am  going  to  recount 
some  things  in  connection  with  its  incorporation, 
and  start  in  business,  which  will  illustrate  my  mean- 
ing. 

As  stated,  I  went  to  the  Legislature  for  my 
charter.  Having  been  a  member  of  the  Senate,  it 
passed  that  body,  but  when  I  got  to  the  House 
with  that  charter,  not  being  as  experienced  then  as 
I  am  to-day,  as  to  what  powers  I  should  ask  for 
(I  was  asking  for  dual  powers,  that  is  :  the  power 
to  act  as  executor,  administrator  and  trustee,  and 
also  to  become  surety  upon  bonds,  just  as  they  do 
in  Philadelphia,  where  all  trust  companies  have 
these  dual  powers.  The  original  name  given  my 
company  was  the  Fidelity  Trust  and  Deposit  Com- 
pany of  Maryland),  my  trouble  began.  The  bill 
went  through  the  first  reading  in  the  House  and 
got  to  the  point  of  discussion.  Then  an  old  friend 
of  mine  from  an  adjoining  county  got  up  and  said, 
**  If  I  vote  for  a  charter  to  this  '  Trust '  or  vote  for 
this  bill,  I  will  be  hanged  on  a  sour  apple  tree  when 


977 

I  go  home."  He  had  associated  the  word  ''Trust " 
with  the  "  Sugar  Trust"  and  "Oil  Trust,"  and  the 
result  was  that  he  made  such  a  flaming  speech  that 
my  bill  was  defeated.  But  I  was  not  discouraged. 
I  saw  where  the  trouble  was,  so  I  went  up  in  one 
of  the  rooms  of  the  State  Capitol,  took  a  pen  and 
struck  out  the  Avord  "Trust"  in  the  bill  wherever 
it  occurred.  Then  I  called  my  friend  and  said,  "  I 
have  removed  all  the  objectionable  features  in  this 
bill  ;  will  you  vote  for  it  ?' '  He  looked  it  over  and 
replied,  "  It  is  all  right ;  you  have  got  that  word 
'  Trust '  out  of  it  and  I  will  vote  for  it."  That  ac- 
counts for  the  peculiarity  of  the  name  of  our  com- 
pany. However,  I  got  my  bill  through.  After  it 
was  passed  by  the  Legislature  I  said  that  the  epi- 
sode reminded  me  very  much  of  a  Texas  editor  and 
an  irate  subscriber  who  felt  that  he  had  been 
grossly  abused  and  went  down  to  the  office  of  the 
newspaper  determined  to  cowhide  the  editor.  The 
editor  said,  "JS'ow,  my  friend,  what  do  you  object 
to?"  "Why  sir,  that  is  the  thing,"  pointing  to 
the  objectionable  paragraph.  The  editor  thereupon 
reached  over,  got.  his  scissors  and  deliberately  cut 
the  article  out,  and  said, ' '  Now,  my  friend,  if  you 
ever  see  anything  in  my  paper  that  you  do  not 
like,  bring  it  down  here  and  I  will  take  pleasure  in 
cutting  it  out." 
It  is  probably  unnecessary  for  me  to  tell  you,  gen- 


978 

tlemen,  of  the  advantages  of  corporate  suretyship, 
but  it  may  not  be  amiss  for  me  to  recite  some  of  its 
advantages.  It  is  the  best,  because  : 
•  1.  It  relieves  business  men  and  persons  possess- 
ing property  from  the  necessity  of  saying  "  no  "  to 
friends  and  relatives  who  may  ask  them  to  qualify 
on  bonds  of  various  kinds,  which,  if  they  did, 
would  create  a  contingent  liability,  impair  their 
financial  credit,  and  involve  a  possible  loss. 

2.  It  enables  heirs  and  next  of  kin  to  become 
trustees,  executors  and  administrators  of  the 
'estates  of  their  deceased  relatives,  and  to  keep  the 
management  thereof  in  the  hands  of  those  most 
interested  in  a  speedy,  cheap  and  proper  settle- 
ment. 

3.  It  relieves  those  required  to  give  bonds  from 
incurring  obligations  by  asking  friends  to  become 
surety  for  them,  and  which  they  would  feel  bound 
to  reciprocate  when  the  opportunity  offered. 

4.  It  removes  all  liability  or  excuse  for  undue 
influence  being  exercised  over  bank  officers,  rail- 
road employes,  contractors  and  public  officials,  by 
those  becoming  surety  for  such  officials. 

5.  It  insures  a  supervision  over  a  person  bonded, 
or  the  estate  or  interest  involved,  that  will  be  an 
incentive  to  rightdoing  and  a  proper  accounting. 

6.  It  guarantees  prompt  payment  of  losses, 
avoids  litigation,  and  enables  the  official  or  em- 


I 


979 

ployer  to  know  the  responsibility  of  the  security 
furnished  them. 

7.  It  often  enables  persons  who  have  no  property 
or  friends  of  financial  standing  to  obtain  positions 
of  trust  and  emolument. 

After  I  had  secured  the  charter  for  the  Fidelity 
and  Deposit  Company  of  Maryland,  I  found  that  I 
had  other  obstacles  to  overcome  in  order  to  place 
the  stock  of  the  company.  There  were  many  busi- 
ness men  who  said,  ''Warfield,  you  can't  make  a 
company  like  that  go  ;  the  business  is  risky  and 
there  is  no  future  to  it."  By  May  1, 1890,  however, 
I  had  succeeded  in  getting  §250,000  subscribed  and 
about  $25,000  paid  in.  Then  I  started  business  and 
we  have  been  succeeding  pretty  well  ever  since. 
We  now  have  a  capital  of  $1,000,000  ;  net  surplus, 
$1,000,000  ;  reserve  and  undivided  profits,  $600,000. 
Our  pathway,  however,  has  not  been  of  the  smooth- 
est character.  I  found  that  the  public  did  not  ap- 
preciate the  advantages  of  the  character  of  surety- 
ship we  offered,  and  that  we  had  just  such  a  cam- 
paign of  education  before  us  as  that  which .  con- 
fronted you,  Mr.  Hegeman,  as  President  of  the 
Metropolitan  Life  Insurance  Company,  when  you 
began  to  teach  the  people  what  a  blessing  to  the 
masses  Industrial  Insurance  is.  We  had  to  edu- 
cate public  officials,  we  had  to  educate  commis- 
sioners, we  had  to  educate  judges  and  men  who 


980 

approve  bonds,  up  to  the  advantages  of  corporate 
surety sliip.  At  that  time  the  Government  of  the 
United  States  was  limited  in  this  matter  to  the  ap- 
proval of  individuals  as  surety  upon  bonds,  and  we 
had  to  secure  legislation  in  that  direction.  Finally, 
in  1894,  we  succeeded  in  having  passed  by  Congress 
an  act  that  authorized  the  approval  of  corporations 
as  sole  surety  upon  bonds  given  by  public  officers, 
and  in  all  judicial  proceedings  in  the  United  States 
Courts.  Then  it  was  necessary  to  get  into  the 
various  States,  and  we  found  that  but  few  States 
had  laws  that  authorized  the  acceptance  of  corpora- 
tions as  sureties  upon  the  bonds  of  public  officers 
or  in  court  proceedings.  There  was  no  trouble  in 
getting  into  the  several  States  as  an  insurance  com- 
pany, and  guaranteeing  the  fidelity  of  bank  em- 
ployes and  others,  but  that  was  not  the  line  I  was 
seeking.  I  wanted  to  be  a  public  benefactor,  and  I 
feel  that  I  have  done  more  by  reason  of  the  devel- 
opments of  this  special  line  of  insurance  to  call 
attention  to  the  advantages  of  corporate  suretyship 
and  to  make  it  popular  than  could  have  otherwise 
been  accomplished.  Why?  Because  the  public 
are  interested  in  the  character  of  bonds  given  by 
public  officers.  The  people  do  not  care  what 
sureties  the  banks  take  on  their  clerks,  or  what 
railroads  do  in  this  particular  ;  that  is  a  matter  for 
the  directors  and  stockholders,  and  also,  in  the  case 


981 

of  banks,  for  depositors  to  look  after ;  but  when 
you  come  to  court  bonds,  and  bonds  of  treasurers, 
insurance  commissioners  and  other  public  officials, 
the  i^eople  have  an  immediate  and  deep  interest. 
ISTow,  I  think  you  insurance  commissioners  are  as 
honest  as  any  other  class  of  men,  and  I  would  be 
very  glad  to  become  surety  for  all  of  you,  any  time 
you  desire  to  be  bonded. 

It  was  calling  the  people's  attention  to  the  char- 
acter of  bonds  given  by  their  public  officials  that 
created  this  great  interest  in  the  matter  of  corpor- 
ate suretyship,  but  I  will  not  bore  you  with  de- 
tails. I  would  like  to  say,  however,  that  when  we 
came  to  the  State  of  Wisconsin,  two  years  ago, 
fortunately  for  this  State,  it  had  an  Attorney-Gen- 
eral and  an  Insurance  Commissioner,  each  of  whom 
recognized  at  once  the  advantages  of  corporate 
suretysliip,  and  put  their  shoulders  to  the  wheel 
and  thus  gave  their  State  one  of  the  best  surety 
laws  in  the  United  States.  We  need  such  men  in 
public  office,  and  I  regret  that  Wisconsin  is  going 
to  lose  their  services.  I  am  pleased  to  learn,  how- 
ever, that  their  successors  have  been  somewhat 
educated  along  the  lines  laid  down  by  them,  so  we 
can  hope  for  a  continuation  of  the  good  work  so 
well  begun. 

Now  there  is  one  question  which  has  caused  dis- 
cussion between  surety  companies  and  insurance 


982 

commissioners  which  I  wish  to  talk  to  you  about, 
that  is :  the  question  of  liability  assumed  by  the 
companies  as  surety  upon  bonds  of  public  officials, 
fiduciaries,  etc.  It  is  very  easy  to  determine  the 
liability  assumed  by  life  insurance  companies. 

When  an  industrial  company,  or  one  like  the 
great  New  York  Life,  issues  a  policy,  it  knows 
that  at  some  future  date  it  has  to  pay  the  amount 
stipulated  in  the  policy  and  must  provide  for  it. 
When  a  fire  insurance  company  issues  its  policy  it 
expects  to  pay  the  penalty  named  therein  in  case 
there  is  a  fire.  In  some  instances  there  may  be,  sal- 
vage, I  believe  you  call  it.  When  a  surety  company 
executes  its  bond  it  does  so  upon  the  theory  that 
it  will  never  be  called  upon  to  pay  it.  Its  liability 
is  not  primary,  but  secondary.  The  principal  is 
called  upon  first  and  his  resources  exhausted 
before  demand  is  made  upon  the  surety.  Every 
liability  assumed  by  a  surety  company  is  also  pro- 
tected by  an  indemnity  ;  just  as  in  double-entry 
bookkeeping,  for  every  debit  there  must  be  a  cor- 
responding credit.  So  we  can  say  that  for  every 
bond  executed  there  must  be  a  corresponding  in- 
demnity. In  many  cases,  however,  where  straight 
Fidelity  bonds  are  given  for  employes,  the  in- 
demnity is  principally  moral  and  not  financial. 
Various  factors  must  be  taken  into  account  in 
calculating  a  Fidelity  risk  ;  such  as  the  young 


983 

man's  surroundings,  Ms  antecedents,  his  character 
and  the  character,  standing  and  financial  worth  of 
his  parents.  In  the  case  of  a  young  clerk  whose 
parents  are  of  good  reputation  and  means,  your  in- 
demnity is  not  the  direct  indemnity  of  the  young 
man  alone,  but'  it  is  that  collateral  and  moral  in- 
demnity of  the  father  and  mother  who  will  sacri- 
fice everything  to  save  their  son.  Such  conditions 
and  surroundings  must  be  taken  into  consideration, 
and  they  have  a  weighty  bearing  on  the  granting 
of  the  bond.  I  have  known  of  cases  where  sons 
have  gone  wrong  and  where  the  parents  have  re- 
imbursed the  son's  employers  for  the  amount 
taken  in  order  to  prevent  the  corporation  which 
insured  his  honesty  from  being  notified  of  his  dis- 
honesty. We  all  know  what  a  mother  and  father 
will  do  to  protect  their  son  and  help  him  out 
of  trouble,  and  it  is  that  indemnity  which  should 
be  taken  into  consideration  in  connection  with 
such  bonds. 

The  theory  of  our  company  is  that  when  demand 
is  made  upon  us  for  the  payment  of  a  loss,  the  de- 
faulter has  exhausted  all  his  resources,  and  there 
is  little  hope  for  him.  We  insist  upon  prosecu- 
tion, but  w^e  feel  that  we  have  no  right  to  inter- 
fere between  the  employer  and  the  employe,  if 
friends  come  in  to  protect  the  guilty.  But  when 
demand  is  made  upon  us,  and  this  is  known  and 


984 

realized  in  every  section  of  the  country,  all  hope  is 
gone. 

The  risk  on  a  Fidelity  bond  is  estimated  at  the 
actual  liability,  that  is :  The  greatest  sum  that 
the  party  bonded  could  get  rid  of  or  steal.  The 
penalty  of  the  bond  is  fixed  at  that  sum,  which 
the  surety  company  might  finally  be  called  upon 
to  pay.  We  consider  such  bonds  the  most  hazard- 
ous risks.  Yet  while  the  Guarantee  Company  of 
North  America  stated  that  the  Fidelity  and  De- 
posit Company  of  Maryland  was  doing  a  risky 
business  because  it  dared  to  guarantee  the  hon- 
esty of  public  officials,  it  assumed  this  hazardous 
line  of  risks  as  its  principal  business.  Now,  I  hold 
that  the  treasurer  of  a  county  is  a  better  risk 
than  the  cashier  of  a  bank.  We  limit  our  liability 
on  the  bond  of  a  cashier  of  a  bank  to  825,000, 
while  we  have  written  the  bond  of  a  county  treas- 
urer in  the  penalty  of  $400,000  and  the  real  lia- 
bility on  that  bond  was  not  as  much  as  on  the 
bond  of  the  cashier  of  the  bank. 

In  1896,  the  bond  of  the  treasurer  of  Omaha  was 
written  by  our  company  in  the  penalty  of  $400,- 
000.  Certain  newspapers  said  that  our  company 
was  doing  a  wildcat  business,  and  one  surety  com- 
pany that  wanted  to  underrate  us  had  the  whole 
thing  published  in  pamphlet  form  and  sent  a  copy 
to  every  bank  in  the  United  States  stating  that 


985 

here  was  a  company  guaranteeing  one  risk  tlie  lia- 
bility of  which  was,  according  to  their  statement, 
§400,000.  As  a  matter  of  fact,  the  actual  liability 
on  that  bond  was  less  than  825,000,  and  I  can 
demonstrate  it.  There  had  been  a  defalcation  in 
Omaha.  This  treasurer's  predecessor  had  stolen 
$130,000,  but  it  took  him  four  years  to  do  it.  The 
whole  system  of  managing  the  treasurer's  depart- 
ment was  rotten,  and  when  we  were  applied  to  to 
take  the  risk  I  said,  "  If  you  will  do  certain  things 
we  will  go  on  the  bond. 

'■'  First,  you  must  protect  us  against  liability  for 
the  funds  deposited  in  bank."  They  acceded  to 
that. 

Second,  ' '  There  must  be  a  countersignature  to 
"  every  check."     They  acceded  to  that. 

Third,  "  the  auditor  must  certify  to  every  tax 
bill  that  is  paid  and  must  keep  a  duplicate  receipt. 

In  addition  to  that  the  treasurer  must  make 
deposits  twice  a  day,  at  ten  and  at  three  o'clock." 
This  demand  was  also  acceded  to. 

As  a  result  of  the  arrangement  made,  the  lia- 
bility was  reduced  to  less  than  $15,000,  although 
we  carry  it  at  $50,000.  You  will  readily  see  that 
the  treasurer  could  not  steal  more  than  one  day's 
receipts,  and  there  is  no  day  in  the  year  when,  if  he 
devoted  all  his  energy  and  ingenuity  to  devising 
ways  and  means  to   steal,  he  could  get  hold  of 


986 

$50,000.  Yet  we  were  criticised  for  writing  tliat 
risk.  Let  me  tell  you  that  we  know  to-day  just 
how  much  money  that  treasurer  has  in  bank,  and 
we  not  only  know  it  in  his  case,  but  we  know  it  in 
the  case  of  every  county,  city  or  State  treasurer 
for  whom  we  have  become  surety. 

In  the  case  of  the  treasurer  of  Omaha,  we  re- 
quire, as  we  do  in  all  similar  cases,  an  addi- 
tional safeguard,  which  is  ;  That  there  shall  be  a 
monthly  examination  made  by  the  city  comptrol- 
ler, who  must  certify  that  the  accounts  are  correct 
and  the  money  deposited.  Now  the  treasurer  can- 
not get  the  money  out  of  the  bank  because  the 
check  must  be  countersigned  by  the  Auditor, 
Comptroller  and  Treasurer,  so  that  the  opportun- 
ity for  tampering  with  the  funds  in  bank  is  taken 
away.  The  only  liability  that  we  really  have  on 
that  case,  and  we  have  had  him  for  two  years,  is 
the  possibility  of  his  stealing  the  money  he  may 
collect  in  one  day.  The  average  collections  there 
are  about  $3,000  or  $4,000  per  day,  which  is  the 
average  daily  measure  of  our  risk.  The  premium 
on  this  bond  is  $1,000  a  year. 

I  am  sorry  to  say,  however,  that  the  surety 
business  is  being  somewhat  demoralized,  like  the 
fire  and  other  insurance  business,  by  new  com- 
panies coming  in  and  cutting  rates.  I  hope,  how- 
ever, that  the  day  is  not  far  distant  when  manhood 


987 

and  intelligence  will  come  to  the  rescue,  and  the 
presidents  of  the  several  companies,  instead  of 
jumping  at  each  other's  throats,  will  come  together 
and  say,  let  us  adopt  rules  for  our  mutual  protec- 
tion. 

I  will  further  demonstrate  the  liability  of  a 
surety  company.  Take  the  risk  of  a  bank 
cashier.  We  go  on  a  bond  for  $25,000,  and  get 
$125  for  it.  ,  There  is  not  a, day  that  a  cashier  has 
not  the  opportunity  to  steal  the  entire  amount  of 
his  bond.  The  same  is  true  of  a  teller,  but  there 
is  not  a  State,  city  or  county  treasurer  in  the 
United  States  whose  liability  is  not  being  lessened 
every  day.  In  the  State  of  Wisconsin,  for  in- 
stance, the  treasurer  must  give  a  bond  in  double 
the  amount  of  money  he  handles.  Will  anyone 
say,  if  he  collects  $50,000,  that  the  liability  is 
$100,000  ?  Will  any  sane  man  say  that  the 
treasurer  could  steal  even  the  whole  $50,000  ?  He 
cannot  collect  it  all  in  one  day.  The  demands 
upon  him  are  such  that  he  is  paying  out  as  fast  as 
he  collects,  so  that  every  day  in  the  year  the 
liability  is  being  reduced.  It  is  not  so  with  life 
insurance.  The  liability  is  the  same  every  day. 
The  liability  on  the  bond  of  a  cashier  is  the  same 
every  day.  The  opportunity  and  temptation  to 
steal  the  amount  of  his  bond  is  before  him  every 
moment  he  is  at  his  desk.     This  is  not  so  with  a 


988 

public  official.  Take,  for  example,  the  Insurance 
Commissioner  of  the  State  of  Maryland.  From 
the  first  day  of  January  until  the  first  day  of  May 
is  the  period  during  which  he  collects  taxes  and 
fees,  and  he  is  required  to  make  his  report  not 
later  than  the  30th  of  June.  After  that  there  is 
no  liability.  And  that  is  the  case  in  nearly  every 
State.  There  is  a  certain  period  when  money  for 
taxes,  etc.,  belonging  to  the  State  is  received,  and 
the  balance  of  the  year  what  they  receive  are 
fees  to  which,  as  a  rule,  they  are  entitled 
themselves. 

There  is  one  very  important  point  to  be  con- 
sidered in  connection  with  the  surety  business,  and 
that  is :  that  it  cannot  be  safely  conducted  with- 
out the  exercise  of  great  caution  and  care,  and  a 
thorough  knowledge  of  the  laws  of  every  State  in 
which  you  are  doing  business.  There  are  States 
in  which  I  would  not  dare  to.  become  surety  for  a 
treasurer.  They  are  States  where  the  laws  hold 
the  officer  responsible  for  the  money  after  it  is  de- 
posited in  bank.  I  hold  that  all  that  should  be 
asked  of  a  public  official  is  that  he  shall  be  honest 
and  painstaking  in  conducting  the  affairs  of  his 
office,  and  that  he  should  not  be  held  responsible 
for  the  safekeeping  of  the  funds  of  his  office  after 
he  has  deposited  the  same  in  a  reputable  bank. 
My  friend,  Dr.  Fricke,  recommended  the  enact- 


989 

ment  of  a  law  covering  this  point,  as  did  also 
Attorney- General  Mylrea.  Tliey  had  j)assed  a 
law  which  required  the  commissioners  to  approve 
the  sureties  upon  the  bonds  of  depositories,  so 
that  when  the  treasurer  put  money  in  bank  his 
sureties  were  not  responsible  for  the  solvency  of 
the  bank. 

When  our  general  counsel  came  out  here  to 
arrange  for  transacting  business  in  this  State,  and 
to  secure  the  necessary  legislation,  all  these  mat- 
ters were  gone  into  fully  and  explained  to  your 
State  officials.  As  we  had  prepared  a  digest  of  the 
laws  of  every  State  in  the  United  States  bearing  on 
the  subject  of  corporate  suretyship,  we  knew  what 
legislation  to  recommend  and  what  safeguards 
were  needed. 

I  will  now  take  up  bonds  given  in  judicial  pro- 
ceedings. I  would  state,  as  a  warning,  that  no 
surety  company  should  write  a  bond  guaranteeing 
the  x)ayment  of  money  at  a  future  date  unless  it 
has  deposited  with  it  collateral  or  cash.  All  exec- 
utors and  administrators  in  Wisconsin  must  give 
bond  in  double  the  amount  of  the  estate.  In  the 
State  of  Minnesota  all  receivers  and  executors 
must  give  bond  in  double  the  amount  of  the  value 
of  the  estate.  To  illustrate  the  watchfulness  of 
the  Insurance  Commissioner  of  Minnesota  I  might 
relate  that  when  we  made  our  annual  report,  two 


990 

years  ago,  we  received  a  letter  from  tlie  Commis- 
sioner, Mr.  Dearth,  whom  we  have  the  pleasure  of 
having  with  us  to-day,  saying  : 

*'  I  cannot  understand  why  you  carry  your  total 
liability  at  about  $2,000,000,  when  I  know  of 
my  own  personal  knowledge  of  one  bond  for 
$2,000,000  that  your  company  went  upon,  and 
another  bond  for  $1,000,000,  and  another  bond  for 
$400,000." 

Well,  that  was  a  natural  question.  The  case  in 
which  the  two  million  dollar  bond  was  required 
was  one  of  public  notoriety,  and  I  was  very  glad  to 
take  up  that  question  with  the  Commissioner,  and 
I  wrote  to  him  explaining  the  matter  fully,  and  he 
wrote  me  that  my  explanation  was  entirely  satis- 
factory. 

The  case  was  that  of  A.  B.  Stickney,  assignee  of 
William  Dawson,  who  was  required  to  give  a  bond 
for  $2,000,000.  The  assets  were  $984,919  nominally, 
but  the  bond,  as  required  by  law,  had  to  be  in 
double  that  amount,  and  was  therefore  fixed  by  the 
Court  at  $2,000,000.  That,  of  course,  relieved  us 
of  $1,000,000  liability.  Of  the  assets  $744,202  con- 
sisted of  real  estate,  all  heavily  encumbered.  The 
assignee  could  not  steal  the  real  estate,  and  could 
not  sell  it  without  first  paying  off  the  liens,  and 
the  amount  of  mortgages  on  the  property  aggre- 
gated nearly  the  scheduled  value  of  the  real  estate. 


991 

The  Court,  however,  could  not  take  this  into  consid- 
eration, but  had  to  take  the  scheduled  valuation  of 
the  property  as  the  basis  of  the  bond.  The  per- 
sonal property  was  inventoried  at  $240,000,  of 
which  $150,000  consisted  of  stocks  of  various  cor- 
porations, most  of  which  stocks  were  hypoth- 
ecated to  secure  loans.  We  all  know  that  banks 
do  not  give  up  hypothecated  stocks  until  the  claims 
against  such  stocks  are  liquidated.  The  result  of 
our  consideration  of  the  case  was  that  we  con- 
cluded that  it  was  impossible  for  Mr.  Stickney  to 
have  available  assets  in  his  hands  of  over  $200,000 
and,  therefore,  that  that  was  the  measure  of  the 
actual  liability  on  his  bond.  The  reports  in  that 
case  show,  however,  that  Mr.  Stickney  has  never 
had  in  cash  in  his  possession  more  than  $15,000. 
[N'ow  what  is  the  real  liability  on  that  bond  ? 
What  would  you  as  intelligent  men  ^is:  as  the 
actual  liability  ? 

The  actual  liability  is  what  a  man  could  get  rid 
of  or  steal.  So  it  is  upon  this  rule  that  we  base 
our  calculations  and  ou/  reports  to  the  various  in- 
surance departments  of  the  country.  Your  depart- 
ments should  only  require  us  to  schedule  the  pos- 
sible risk,  as  our  premiums  upon  such  bonds  are 
based  upon  the  estimated  or  possible  liability. 
Our  charge  in  the  Stickney  case  was  1/2  of  1%, 
or  $1,000  on  $200,000,  estimated  as  just  stated.     If 


992 

the  actual  liability  had  been  $2,000,000  the  pre- 
mium  would  have  been  $10,000.  Now  Mr.  Dearth 
is  a  lawyer  and  can  probably  more  fully  appreciate 
matters  of  this  kind  than  one  who  is  not  a  lawyer. 
He  wrote  to  us  and  said,  *'  I  fully  appreciate  the 
force  of  your  argument  and  can  at  once  perceive 
that  your  method  of  treating  the  liability  is  cor- 
rect." 

These  questions  are  constantly  arising,  and  the 
insurance  commissioners  should  understand  that 
the  liability  assumed  by  surety  companies  is  con- 
tingent and  must,  in  most  cases,  be  estimated.  In 
Minnesota  the  costs  for  bonds*  are  allowed  by  the 
Courts,  in  which  case  it  would  be  to  our  interest  to 
increase  the  premium  by  increasing  the  liability. 

Other  things  must  be  considered  in  executing 
bonds  for  administrators.  Suppose  Mr.  McCall 
wanted  a  bond  for  $100,000  as  administrator  of 
his  son's  estate.  In  the  State  of  Maryland  he 
would  be  the  sole  heir  of  his  son,  and  if  it  was 
shown  to  us  that  the  son  had  no  debts,  what  would 
be  the  liability  ?  He  is  entitled  to  all  of  the  estate. 
Then  where  does  your  liability  come  in  ?  Is  it  not 
apparent  that  all  these  things  must  be  looked  into 
carefully  ? 

We  never  execute  a  Judicial  bond  in  any  section 
of  the  country  unless  it  is  passed  upon  by  our  res- 
ident attorney.    In  this  city,  for  instance,  we  have 


993 

Mess.Yan  Dyke,  Yan  Dyke  &  Carter,  and  no  Judi- 
cial bond  can  be  executed  until  they  approve  it  as 
a  safe  risk. 

The  percentage  of  loss  on  bonds  in  Judicial  pro- 
ceedings is  very  much  less  than  that  on  Fidelity 
bonds,  such  as  those  for  bank  cashiers  and  those 
occupying  similar  positions.  Let  me  illustrate  : 
Twice  a  week  the  Executive  Committee  of  our 
Company,  representing  a  majority  of  its  $1,000,000 
of  stock,  meet  and  examine  every  proposed  risk 
and  indicate  their  respective  ideas  of  the  risk  in 
writing,  and  they  are  very  careful  in  doing  this 
because  in  our  State  they,  as  stockholders,  are  liable 
for  double  the  face  value  of  their  stock.  In  the 
early  history  of  our  company,  on  one  occasion,  an 
application  for  a  bond  of  a  cashier  in  a  bank  in  the 
penalty  of  $25,000,  was  presented.  The  cashier 
had  been  employed  in  the  bank  for  over  forty 
years,  and  the  risk  was  jumped  at  by  the  directors, 
and  very  quickly  initialed  '*0.  K."  The  same 
day  I  laid  before  them  an  application  for  a  bond  of 
the  Sheriff  of  Kent  County,  Maryland.  This  was 
an  old  slave  county,  and  the  bond  of  the  sheriff  had 
been  fixed  by  the  constitution  at  $25,000.  It  was 
fixed  in  the  days  of  slavery,  when  personal  property 
generally  was  very  large.  I  had  been  in  the  court 
house  of  my  county  in  my  early  days  and  had 
studied  law  there  and  knew  exactly  what    the 


994 

liability  on  a  sheriff's  bond  was.  I  knew  that  if 
that  sheriff  spent  the  whole  two  years  of  his  term 
in  trying  to  devise  means  to  steal  and  appropriate 
to  his  own  use  the  funds  of  the  county,  that  he 
could  not  possibly  get  $5,000.  The  directors  hesi- 
tated, but  I  argued  with  them  and  finally  they  ap- 
proved the  risk. 

One  of  our  stockholders  heard  something  about 
the  transaction  and  wrote  to  me  calling  it  a  piece 
of  wildcat  business  and  wanted  to  sell  his  stock, 
which  he  actually  did.  That  same  stockholder, 
however,  thought  the  bond  of  the  cashier  just 
referred  to  an  excellent  risk.  Well,  we  all  thought 
so  too,  but  a  year  after  the  bond  was  executed  it 
was  discovered  that  that  man,  whom  we  all  trusted 
so  implicitly,  was  found  short  in  his  accounts,  and 
we  paid  $17,500  on  account  of  his  bond.  The  sheriff, 
however,  settled  his  accounts  promptly  and  satis- 
factorily and  we  made  $250  by  writing  his  bond. 

When  I  first  began  my  educational  crusading 
throughout  the  country  I  usually  took  my  wife 
with  me.  Our  first  trip  was  through  Kentucky, 
Tennessee  and  the  South  generally,  and  as  she  did 
not  like  to  remain  at  the  hotels,  she  was  in  the 
habit  of  going  with  me  to  the  court  houses,  banks 
and  public  offices  and  hearing  me  tell  the  same  old 
story.  At  Atlanta,  on  one  occasion,  after  we  had 
visited  the  Governor  and  Ti-easurer,  we  went  over 


995 

to  see  the  Ordinary,  who  is  the  official  that  ap- 
proves many  court  bonds.  We  went  in,  and  after 
the  introduction  I  said  :  "I  feel  very  much  at 
home  in  an  Ordinary's  office,  for  my  early  days 
were  spent  in  office  as  Register  of  Wills,  which  is 
very  much  the  same  as  your  office.  I  want  to  talk 
with  you  about  the  acceptance  of  my  company 
upon  bonds."  He  quickly  replied:  "I  don't  be- 
lieve in  surety  companies  and  won't  accept  them." 
I  was  abashed.  His  name  was  Calhoun,  and  you 
know  that  old  Calhoun  blood  is  pretty  testy.  So  I 
merely  said:  "I  am  very  sorry,  but  I  think  the 
day  will  come  when  you  will  change  your  mind. 
Good-bye."  I  got  out,  and  Mrs.  Warfield  re- 
marked: ''I  am  very  glad  that  you  have  struck 
somebody  that  has  sat  down  on  you."  And  she 
twits  me  on  that  episode  constantly.  But  Mr. 
Calhoun's  term  expired,  and  we  had  created  such  a 
sentiment  down  there  in  favor  of  our  company 
that  he  had  to  get  up  and  proclaim  that  he  would 
accept  corporate  suretyship  because  it  was  the  best 
and  safest,  but  he  came  to  his  senses  too  late  and 
was  defeated. 

There  is  one  thing  to  which  I  would  like  to  call 
your  attention,  and  what  I  shall  say  applies  to  all 
companies  doing  this  line  of  business.  Life  in- 
surance companies  have  gone  through  the  sifting 
process,  the  slow  process  of  fixing  the  law  applica- 


996 

ble  to  tlieir  policies,  and  their  policies  have  all 
been  passed  upon.  Industrial  and  fire  insurance 
policies  have  been  passed  upon,  and  the  law  affect- 
ing them  is  pretty  well  established  throughout  the 
country.  But  in  the  case  of  surety  companies  a 
great  deal  of  litigation  will  be  required  to  fix 
liability.  The  simple  fact  of  a  suit  being  brought 
on  a  bond  is  not  evidence  in  itself  that  the  com- 
pany refuses  payment.  The  principal  for  whom 
we  underwrite,  and  whose  honesty  we  guarantee, 
has  rights  that  must  be  adjudicated,  and  he  says  : 
''  You  stand  back  !  I  am  amply  able  to  take  care 
of  this.  I  have  got  means  and  some  rights,  and  I 
want  the  court  to  pass  upon  this  question  before 
the  bond  is  paid."  We  can  do  nothing  in  such  a 
case  except  to  abide  by  the  result,  unless  the  man 
is  notoriously  unable  to  meet  the  demand.  We 
have  indemnity,  and  if  we  are  not  satisfied  we  ask 
additional  indemnity.  So  when  you  see  a  notice 
of  a  suit  instituted  against  a  surety  company  you 
must  not  take  it  for  granted  that  the  company  is 
refusing  to  pay.  Our  policy  is  to  pay  promptly, 
unless  the  principal  insists  upon  an  adjudication. 
We  have  such  a  case  in  Baltimore  now,  involving 
$6,000  or  $7,000.  In  this  case  the  amount  involved 
is  in  dispute,  and  litigation  is  necessary  to  deter- 
mine the  exact  amount.  We  are  amply  indemni- 
fied against  loss,  yet  the  report  is  spread  about 


997 

that  the  Fidelity  and  Deposit  Company  of  Mary- 
land is  being  sued.  All  we  ask  of  you  is  that  if 
there  is  any  question  in  your  minds  as  to  the 
solvency  of  our  company,  ask  us  about  it,  and  we 
will  only  be  too  glad  to  furnish  you  with  all  the 
facts.  That  is  what  you  ought  to  ask  every  com- 
pany. There  is  always  some  reason  for  a  suit.  As 
I  said  before,  we  have  got  to  go  through  a  period 
of  litigation  in  order  to  have  established  the  law 
applicable  to  corporate  suretyship.  We  have  got 
to  stand  on  the  same  basis  as  other  insurance  com- 
panies. The  courts  are  not  going  to  be  liberal  in 
their  construction  of  the  law.  We  had  one  case  in 
this  city  of  a  bond  that  only  involved  $89,  where 
the  judge  said  :  "  Well,  I  don't  think  the  company 
is  liable,  but  we  have  been  approving  a  good 
many  of  their  bonds  and  they  might  as  well  pay 
this." 

They  are  going  to  apply  the  same  rules  to  us 
that  they  do  to  other  insurance  companies.  The 
individual  surety  is  always  met  with  sympathy,  but 
the  courts  will  say  of  a  corporation,  ' '  You  charge 
for  these  bonds  and  we  are  going  to  be  pretty 
strict  in  our  interpretation  of  the  law  as  against 
you."  . 

'Now  there  is  another  point  that  I  would  like  to 
bring  out  regarding  the  dual  powers  granted  to 
surety  companies  which  authorize  them  to  act  as 


998 

executor,  administrator  and  trustee  and  also  to  be- 
come surety  on  bonds.  In  our  State  I  secured  the 
passage  of  a  law  that  required  all  companies  hav- 
ing dual  powers,  to  elect  whether  they  would  do 
the  surety  business  or  the  trust  business.  I  con- 
tended that  a  company  had  no  right  to  put  the 
same  capital  stock  behind  trusts  without  giving 
bonds,  and  behind  liabilities  as  .surety.  There  are 
many  companies,  however,  in  this  country  having 
dual  powers,  as  in  Pennsylvania,  for  instance, 
where  the  same  company  can  act  as  administrator, 
executor  and  trustee,  and  also  as  surety  on  bonds. 
I  do  not  think  that  should  be  allowed.  I  believe  a 
company  should  act  purely  as  a  trust  company  or 
purely  as  a  surety  company. 

I  am  greatly  indebted  to  all  of  you,  gentlemen,  for 
your  attention.  My  remarks,  have,  of  course, 
been  desultory,  but  I  have  endeavored  to  xjover  the 
points  that  are  interesting  in  our  line  of  business. 

Before  closing  I  want  to  suggest  to  you  Commis- 
sioners that  when  you  adjourn  this  Convention, 
you  adjourn  to  meet  in  Baltimore,  and  that  you 
make  the  time  of  meeting  November  instead  of 
September,  as  Baltimore  weather  is  more  fpleasant 
during  that  month  and  our  terrapin  and  other 
Chesapeake  delicacies  are  then  in  prime  condition. 
If  you  will  come  I  promise  you  that  you  will  carry 
away  with  you  many  pleasant  recollections  of  the 


999 

place,  and  that  you  will  be  tendered  a  most  hos- 
pitable reception.     The    latchstring  in  Maryland 
hangs  on  the  outside  always.     Come  and  see  us. 
I  thank  you  very  much  for  your  attention. 


THE  STATE  AND  CASUALTY 
INSURANCE. 


GEO.  F.  SEWARD  : 

T  NSUE.ANCE  is  generally  thought  to  be  a  mys- 
^  terious  kind  of  business  in  which  many  things 
deleterious  to  the  public  are  practiced.  As  a  con- 
sequence the  States  have  legislated'much  about  it 
and  about  insurance  companies  andThave  provided 
expensive  bureaus  to  enforce  their  .legislation. 
Those  of  us  who  follow  insurance  know  that  it  is  a 
very  simple  business,  and  are  apt  to  believe  that 
the  proper  concern  of  the  State  in  our  work  is 
equally  simple.  Such  at  least  are  my  own  views, 
and  I  desire  to  give  in  this  paper  reasons  for  the 
faith  which  is  in  me. 

Insurance,  as  carried  on  in  this  country,  is  not  a 
public  function.  It  may  be  made  so,  of  course,  by 
any  State  which  chooses  to  set  up  in  the  business. 
As  conducted  by  the  companies,  it  is  a  branch  of 


1001 

private  enterprise,  pure  and  simple.  The  stock- 
holders provide  the  requisite  capital  and  business 
plant.  There  is  no  partnership  with  the  State, 
and  no  pecuniary  responsibility  rests  upon  the 
State  ;  nevertheless  the  State  interferes  w^ith  insur- 
ance enterprises  in  extreme  ways. 

Let  it  be  admitted  that  there  is  call  for  a  certain 
care  on  the  part  of  the  State.  If  a  man  engages  in 
trade  he  both  buys  and  sells  goods.  The  insur- 
ance man  does  neither.  He  sells  promises  to  in- 
demnify against  loss.  He  gets  but  little  for  each 
contract,  but  his  promises  may  average  large  and 
may  be  numerous.  The  man  who  trades  in  goods 
may  fail.  If  he  does,  loss  will  fall  upon  a  few  in- 
dividuals. When  an  insurance  company  fails,  the 
area  of  suffering  is  likely  to  be  wide.  And  there 
is  this  further  difference  between  insurance  and 
other  lines  of  business.  People  who  buy  mer- 
chandise can  examine  it  and  know  what  they  are 
getting.  Those  who  sell  can  give  credit  or  not,  as 
they  please.  If  they  do  give  credit  they,  can  test 
the  solvency  of  proposing  buyers.  But  the  man 
who  buys  insurance  parts  with  his  money,  and  is 
seldom  able  to  estimate  accurately  the  present  con- 
dition of  the  company,  much  less  its  prospects  of 
permanent  solvency. 

What  the  individual  cannot  do  for  himself  the 
State  ought  to  do.     It  should  report  upon  the  fi- 


1002 

nancial  condition  of  companies,  and  should  know 
that  their  methods  conform  to  sound  rules.  The 
State  has  no  other  duty,  and  whenever  it  goes 
further  it  is  interfering  without  need  and  vexa- 
tiously  in  the  private  affairs  of  the  people. 

A  right  manager  will  welcome  all  inquiries  by 
the  State  directed  to  questions  of  the  solvency  of 
his  company  because  he  recognizes  the  right  of  the 
State  to  make  them  and  because  it  is  a  good  thing 
for  his  company  to  receive  a  certificate  of  sound- 
ness. It  is  good  also  to  be  rid  of  the  competition 
of  unsound  and  irresponsible  competitors  as  a  re- 
sult of  the  care  of  the  State. 

The  States  unfortunately  do  not  confine  their 
legislation  and  scrutiny  to  questions  of  solvency 
with  incidental  inquiries  as  to  methods.  They  en- 
deavor to  do  many  other  things.  In  doing  so  they 
load  the  companies  with  expenses  and  restrict 
their  operations.  It  is  the  interest  of  the  public 
that  sound  companies  should  be  multiplied.  The 
States  have  legislated  much  in  ways  which  inter- 
fere with  the  formation  of  companies  and  which 
burden  unduly  the  companies  which  struggle  into 
existence. 

Take,  for  instance,  the  matter  of 

TAXATION. 

I  am  at  a  loss  to  see  merit  in  the  course  gener 


1003 

ally  pursued  by  the  several  States  in  taxing  pre- 
miums and  in  levying  other  burdens  upon  the 
companies  under  the  head  of  license  fees,  occupa- 
tion taxes,  etc.,  etc. 

If  it  is  supposed  that  these  taxes  are  borne  by 
the  companies  they  are  excessive.  The  companies 
expect  to  make  an  underwriting  profit  of  from 
three  to  five  per  cent.  Sometimes  they  do  better  ; 
often  they  do  worse.  If,  now,  three  per  cent,  or 
five  per  cent,  is  a  normal  margin  of  profit,  by  what 
logic  is  a  tax  levied  on  premiums  which  amounts 
in  some  States  to  one-half  of  one  per  cent.,  and  in 
other  States  to  two  and  even  three  per  cent.?  Is  it 
right  for  the  State  having  no  partnership  in  a  busi- 
ness undertaking  and  no  financial  responsibility 
for  its  transactions  to  take  from  it  a  tenth  part  or 
a  fifth  part,  or  all  or  even  more  than  all  of  its 
profits  ?  If  the  States  should  tax  farmers  or  other 
producers  on  such  lines  what  would  be  thought  of 
it  ? 

As  a  matter  of  fact,  however,  the  companies  do 
not  pay  the  taxes.  They  endeavor  to  load  their 
premiums  enough  to  defray  them,  and  the  burden 
falls  upon  the  insurance  consumer. 

There  are  various  points  to  be  raised  in  this  con- 
nection. 

1st.  It  is  a  wasteful  method  of  collecting  a 
tax.     The  insurance  company  gets  its  premiums  in 


1004 

driblets,  and  it  has  expenses  to  meet  for  manage- 
ment, canvassing,  bookings,  inspections  and  ad- 
justments. As  a  consequence  it  must  collect  from 
the  assured  the  one  dollar  which  it  expects  to  pay 
for  losses  and  a  second  dollar  to  cover  the  expense 
account.  You  will  see  that  the  insurance  con- 
sumer is  mulcted  under  this  system  two  dollars 
for  each  dollar  of  tax  that  the  State  recovers. 

2d.  It  is  a  class  tax.  The  insurance  consumers 
only  pay  it ;  the  persons  who  do  not  insure  pay 
not  at  all.  In  fact  the  incident  of  general  taxation 
is  less  for  non-consumers  in  the  measure  of  the 
contributions  of  insurance  consumers  to  the  gen- 
eral funds  derived  from  taxation,  not  required  for 
insurance  expenses. 

3d.  It  is  an  illogical  tax.  It  is  not  based  on  a 
man's  property,  nor  on  his  earnings,  nor  on  his 
profits,  but  on  an  expenditure  made  to  conserve 
something  which  he  already  has,  and  as  respects 
which  he  already  bears  the  burden  of  taxation. 
It  is  levied  upon  the  promise  of  an  insurance  com- 
pany to  pay  an  indemnity  for  loss  he  may  suffer — 
the  loss  of  life,  or  of  limb,  or  of  property,  or  from 
damage  suits,  or  what  not. 

4th.  It  is,  in  fact,  a  tax  upon  prudence,  upon 
the  self-denial  which  prudence  dictates,  upon  the 
means  taken  to  preserve  for  the  individual  and  for 
the  State  the  usual  subjects  of  taxation,  upon  the 


1005 

means,  it  may  be,  which  will  prevent  disaster  to 
the  ^iven  insurance  consumer  and  his  clients,  to 
prevent  his  family  or  their  families  from  becoming 
a  charge  upon  public  charity. 

If  all  this  is  true,  and  it  is  not  possible  to  deny 
the  accuracy  of  my  points,  then  surely  the  State  is 
not  merely  taxing  insurance  consumers  too  much — 
it  should  not  tax  them  at  all. 

It  is  a  curious  fact  that  the  States  collect  insur- 
ance taxes  from  sound  insurance  interests  and  let 
the  less  solid  interests  go  free.  The  policy-holder 
of  the  company,  with  a  capital  and  reserves,  pays 
the  tax.  The  policy-holder  of  the  mutual,  frater- 
nal and  co-operative  company  does  not.  This  in 
effect  works  a  discrimination  against  stock  com- 
panies in  favor  of  those  which  are  often  weak  and 
often  fraudulent.  It  is  a  strange  sort  of  procedure 
to  exercise  in  the  name  of  good  government. 

I  do  not  think  that  I  dwell  on  this  matter  unduly, 
but  perhaps  I  ought  to  explain  that  it  is  hard  for  a 
company  to  pay  out  in  the  way  of  taxes,  even  if  it 
does  so  on  behalf  of  its  policy-holders,  more  than 
it  pays  its  stockholders  for  dividends. '  My  stock- 
holders put  up  as  capital  the  sum  of  $250,000.  It 
is  not  much.  They  draw  in  dividends  $50,000 
against  a  premium  income  of  $3,500,000.  The 
States  and  the  general  government  take  from  us 
about  $60,000  for  taxes.     It  might  seem  a  question 


1006 

almost  whether  the  company  exists  for  its  stock- 
holders or  as  a  subject  for  taxation  ;  whether  the 
manager  who  builds  a  company  should  be  paid  by 
the  company  or  by  the  State. 

POWERS. 

Under  this  head  I  shall  deal  with  the  question  of 
charter  privileges  and  of  requirements  as  to  capital. 

In  life  insurance  a  successful  company  makes  a 
large  accumulation  of  funds.  It  is  money  which 
should  be  safeguarded  to  the  last  degree  because 
it  is  held  in  trust  for  widows  and  orphans.  Many 
of  the  States,  with  right  recognition  of  this  fact,  da 
not  permit  life  companies  to  hazard  their  funds  by 
engaging  in  any  other  kind  of  business.  Some 
of  them  have  not  drawn  the  line  so  closely.  The 
latter  States,  in  my  judgment,  are  unwise. 

In  these  same  lax  States  a  savings  bank  not  only 
can  not  engage  in  business  of  any  sort  but  must  invest 
its  funds  in  carefully  restricted  ways.  The  life  com- 
pany has  generally  a  wider  range  for  investments 
open  to  it  and  may,  in  addition,  engage  in  other  in- 
surance enterprises.  In  line,  the  State  is  more 
careful  in  dealing  with  deposits  made  by  individ- 
uals for  their  own  benefit  while  living  and  as  to 
which  they  can  exercise  care,  than  it  is  in  dealing 
with  the  accumulations  of  the  life  companies  held 
for  widows  and  orphans  and  as  respects  whioh 


1007 

neither  the  policy-holder  nor  his  beneficiary  can 
exercise  adequate  scrutiny. 

The  departure  from  an  intelligent  and  logical 
procedure  thus  stated  is  found  to  be  wider  on  ex- 
amination. The  life  manager  who  undertakes  ac- 
cident insurance,  or  any  other  line,  parades  his 
large  accumulations  in  order  to  gain  credit  for  his 
side  venture.  His  side  venture  may  be  under- 
taken because  it  affords  chances  for  individual 
profit-making  not  open  in  the  life  depart- 
ment. What  could  be  easier,  for  instance,  than 
to  distribute  expenses  so  as  to  load  the  life 
side  unduly  and  leave  greater  latitude  for  the  pay- 
ment of  salaries  and  dividends  in  connection  with 
the  outside  lines?  Clearly,  the  life  companies 
should  be  permitted  to  do  no  other  business. 

On  the  contrary,  no  just  reason  can  be  advanced 
why  a  fire  company  should  not  transact  plate  glass 
insurance,  or  a  marine  company  tornado  insur- 
ance, or  an  accident  company  boiler  insurance, 
or  a  fidelity  company  liability  insurance,  or  why 
any  company  should  not  do  several  or  all  of  these 
lines. 

The  soundness  of  this  position  will  be  more  evi- 
dent when  one  remembers  that  the  reserves  of  all 
casualty  companies  are  made  on  the  same  rule. 
The  casualty  company  is  considered  solvent  whe- 
ther it  does  a  marine  or  fire  or  accident  business, 


1008 

or  whatever  other  business,  which,  after  putting  in 
reserve  all  of  its  unearned  premiums  and  enough 
money  to  discharge  all  outstanding  obligations, 
has  its  capital  intact.  There  is  no  other  rule  in 
any  State,  and  no  other  rule  is  necessary.  And  if 
this  rule  is  right  and  affords  an  absolute  test  of 
solvency,  of  what  concern  is  it  whether  the  premi- 
ums come  from  one  source  or  many  ?  Insurance 
depends  indeed  upon  the  breaking  up  of  the 
amount  at  hazard  among  a  large  number  of  small 
risks.  Why  should  not  the  gross  amount  at  hazard 
be  divided  among  risks  of  diverse  sorts,  and  effect 
be  given  to  the  old  rule  against  putting  all  one's 
eggs  in  one  basket  ? 

I  have  fought  for  this  principle  through  the 
whole  period  of  my  insurance  experience.  I  be- 
lieve in  it  thoroughly.  I  point  to  the  success  of 
my  own  company  and  to  the  ever- widening  accept- 
ance of  the  principle  as  evidence  of  the  soundness 
of  my  view.  There  will  be  single  liners  in  future  ; 
there  will  be  also  companies  doing  several  lines.  I 
predict  that  the  latter  will  be  of  greater  magnitude 
and  greater  solidity.  That  has  been  the  experi 
ence  abroad  in  States  where  freedom  of  effort  has 
been  the  rule. 

If  a  company  is  to  do  more  than  one  casualty 
line,  always  including  fire  and  marine  under  the 
head  of  **Ca8ualt3%"  manifestly  the  requirement 


1009 

as  to  capital  should  not  be  excessive.  Can  you 
tell  me  why  the  Equitable  Life  can  get  on  with  a 
capital  of  $100,000  and  a  casualty  company  should 
be  held  to  need  $100,000  or  $200,000  for  each  de- 
partment or  branch  of  its  business  ?  As  I  have 
pointed  out,  the  test  of  a  company's  soundness  is 
in  the  right  statement  of  its  reserves,  its  capital 
being  intact.  Its  capital  may  be  $500,000  or 
$50,000,  or  $5.  If  it  is  intact,  the  company  is 
sound.  The  possession  of  capital  in  sufficient 
measure  to  afford  an  initial  guarantee  fund  is,  no 
doubt,  desirable.  But  losses  and  expenses  are 
paid  from  premiums,  and  every  unnecessary  dollar 
put  into  capital  is  a  burden.  The  capital  of  my 
own  company  is  small.  We  transact  twenty  dif- 
ferent lines  of  insurance,  and  our  insurance  lia- 
bilities exceed  $600,000,000,  yet  nobody  questions 
our  solvency,  nor  the  prospect  of  our  remaining 
solvent.  Why  should  they  ?  We  do  not  need  to 
compare  small  things  to  great,  but  we  may  cite 
again  the  Equitable  Life.  That  great  institution 
is  solvent  because  of  its  reserves,  not  because  of 
its  capital.  It  makes  its  reserves  according  to  the 
rules  for  life  companies.  We  make  ours  accord- 
ing to  the  rules  for  casualty  companies,  and  with 
neither  of  us  is  the  capital  of  consequence,  saving 
as  a  nucleus  of  organization. 


1010 


DEPOSITS. 


I  am  not  averse  to  a  deposit  in  the  State  of  the 
company  of  all  or  any  part  of  the  company's  capi- 
tal. The  State  will  keep  such  funds  safejly  no 
doubt,  and  the  right  manager  having  no  use  for 
capital,  saving  as  a  nucleus  of  organization  and  a 
basis  of  initial  credit,  may  as  well  have  his  funds 
in  deposit  as  not.  But  I  do  strenuously  object 
to  the  requirement  of  a  deposit  in  any  other  than 
the  home  State. 

The  theory  is,  of  course,  that  such  deposits  are 
made  for  the  security  of  policy-holders  in  the  State. 
If  the  idea  should  be  carried  to  its  logical  end  the 
demand  should  not  for  a  special  deposit  of  so 
many  dollars,  but  for  a  deposit  of  right  reserves 
against  all  business  done  by  the  given  company  in 
the  given  State.  A  deposit  of  $50,000  or  any  other 
sum  may  be  onerous,  or  it  may  be  inadequate.  A 
deposit  of  the  right  reserves,  if  the  system  could  be 
worked  out  practically,  would  not  be  onerous,  and 
it  would  always  be  adequate.  In  this  case,  as  in 
cases  which  have  preceded,  there  has  been  a  lack 
of  logic  in  legislation. 

Dealing  with  the  matter  further,  let  me  ask,  first, 
what  right  has  a  company  to  make  any  deposit 
outside  of  the  State  in  such  manner  as  to  give  a 
preference  among  creditors  ?    Does  any  one  imag- 


1011 

ine  that  if  this  question  is  ever  brought  before  the 
Supreme  Court  of  the  United  States  it  will  not 
be  ruled  that,  special  deposits  to  the  contrary  not- 
withstanding, the  creditor  of  the  company  in  New 
York  has  the  same  rights  in  the  moneys  deposited 
in  Ohio  as  the  Ohio  creditor  has. 

Let  me  ask  next  why  a  company  should  be  called 
upon  to  make  its  capitalization  so  large  as  to  pro- 
vide for  special  deposits  in  different  States.  If 
$50,000  should  be  called  for  in  each  of  forty  States, 
every  company  intending  to  enter  all  such  States 
would  need  $2,000,000  of  capital.  Perhaps  some 
of  us  who  are  quite  capable  of  serving  useful  insur- 
ance functions  might  be  unable  to  finance  such  large 
requirements  and  even  more  unable  to  earn  enough 
to  pay  dividends  on  the  enormous  amount. 

Let  me  ask  again  what  results  for  the  insuring 
public  might  be  expected  from  a  general  introduc- 
tion of  the  system  of  special  deposits.  New  com- 
panies would  not  be  created.  The  small  ones  al- 
ready in  existence  would  go  out  of  business.  A 
practical  monopoly  would  thus  be  established  in 
favor  of  older  companies  having  already  large  accu- 
mulations of  surplus  out  of  which  the  deposits 
might  be  made.  Would  this  be  well  for  the  insur- 
ing public  ?  Is  it  the  way  to  promote  and  foster 
the  insurance  enterprises  of  the  people  ? 


1012 


FORMS   OF    CONTRACT. 


It  is  supposable  that  a  company  may  frame  its 
contracts  so  as  to  delude  the  public.  The  carefully 
worded  conditions  common  to  all  policy  contracts 
are  pointed  to  often  as  evidence  of  such  designs. 
It  may  be  stated,  however,  that  conditions  are 
introduced  into  policy  contracts  for  the  purpose  of 
excluding  uninsurable  hazards  and  to  define  the 
hazards  so  ag  to  give  the  law  of  average  effect. 
A  policy  without  conditions  would  be  absolute  evi- 
dence of  the  incapacity  of  the  maker  of  it.  How- 
ever this  may  be,  if  insurance  is  a  private  enter- 
prise the  seller  of  the  contract  has  the  absolute 
right  to  offer  any  contract,  not  delusive,  which  he 
pleases. 

Practical  instances  of  the  viciousness  of  State 
interference  with  forms  of  contract  may  be  cited 
here. 

1st.  The  valued  policy  law.  tJnder  this  law  a 
lire  company  is  required  to  pay  the  full  face  of  the 
policy  if  the  property  insured  is  burnt.  The  ob- 
jection to  this  is  that  it  is  easy  to  deceive  a  com- 
pany when  a  policy  is  procured  so  as  to  get  insur- 
ance for  more  than  the  actual  value  of  the  prop- 
erty and  that  the  law  thus  operates  to  promote 
fraud. 

2d.  In  one  State  a  law  provides  that  suicide 


1013 

shall  be  no  defense  against  a  claim  under  a  life  or 
accident  policy.  In  other  words  a  man  may  take 
out  a  policy  against  accidents  in  the  sum  of 
$10,000,  pay  for  it,  say  $15,  for  three  months  and 
then  make  way  with  himself,  the  company  being 
bound  to  pay  the  principal  sum  of  the  policy 
although  it  has  specifically  provided  in  the  policy 
that  it  does  not  cover  suicide.  Ought  not  this  law 
and  the  valued  policy  law  to  be  entitled  "  Laws  to 
Promote  Frauds  on  Insurance  Companies ' '  ? 

In  this  matter  of  the  forms  of  contracts  the  right 
theory  would  be  to  leave  the  companies  free. 
Competition  between  companies  will  work  out  all 
rightful  objects. 

NULLIFICATION  OF  CONTRACTS. 

The  Constitution  of  the  United  States  provides 
that  no  State  shall  pass  a  law  invalidating  con- 
tracts. The  States  deal  with  insurance  companies 
habitually  as  if  their  contracts  are  to  be  construed 
not  according  to  their  language  and  their  sense, 
but  in  view  of  the  provisions  of  State  statutes.  It 
is,  for  instance,  a  settled  principle  of  law  that  the 
written,  executed  and  delivered  contract  sets  forth 
the  agreements  of  the  parties,  and  that  where  the 
wording  is  clear  parole  evidence  can  not  be  intro- 
duced to  explain  the  contract.  Yet  it  is  a  common 
thing  in  some  States  to  explain  away  this  or  that 


1014 

provision  of  an  insurance  contract  by  showing  that 
the  agent  had  knowledge  of  a  fact  not  disclosed  to 
the  company.  In  other  words,  the  document 
signed,  sealed,  delivered  and  accepted  as  the  final 
expression  of  the  agreement  between  the  parties, 
and  altogether  clear  in  its  terms,  may  be  upset 
by  parole  evidence  of  what  the  assured  may  have 
said,  or  thought  he  said,  to  an  agent,  or  of  what 
the  agent  may  have  known  otherwise,  although 
the  policy  may  distinctly  provide  that  the  agent 
had  no  right  to  waive  any  clause  of  the  policy  and 
that  no  knowledge  of  an  agent  shall  work  a 
waiver. 

If  such  liberties  were  taken  with  ordinary  busi- 
ness contracts  what  indignation  would  be  aroused. 

REMOVAL    OF    CASES. 

It  has  become  common  among  the  States  to  pro- 
vide that  if  suit  upon  a  policy  is  brought  in  a 
court  of  the  State  and  the  company  causes  the 
suit  to  be  removed  to  a  federal  court,  its  license 
to  do  business  shall  be  revoked.  This  is  a  practi- 
cal nullification  of  the  Constitution  of  the  United 
States.  It  appears  to  me  unworthy  of  any  State 
for  that  reason  and  also  because  it  involves  an  as- 
sumption that  the  rights  of  the  citizen  are  less  se- 
cure in  the  federal  courts  than  in  those  of  the 
State.    This  may  be  true  if  the  State  is  to  say,  for 


1015 

instance,  that  suicide  is  no  defense,  but  it  can  not 
possibly  be  true  if  the  old  landmarks  of  righteous- 
ness in  legislation  are  to  be  observed. 

Summing  up  now  what  has  been  said,  it  will  be 
seen  that  there  is  ground  for  the  companies  to  ask 
the  States  to  refrain  from  certain  courses,  as  fol- 
lows : 

1st.  From  levying  taxes  on'  insurance. 

2d.  From  limiting  unduly  charter  powers. 

3d.  From  demanding  unnecessary  capitalization. 

4th.  From  requiring  special  deposits  in  other 
States. 

5th.  From  dictating  the  forms  of  contracts. 

6th.  From  legislating  so  as  to  annul  the  clear 
intent  of  contracts. 

7th.  From  refusing  to  the  companies  access  to 
the  federal  courts. 

You  will  see  at  once  that  our  grievances  are 
such  as  have  been  common  in  all  ages  and  all 
lands.  It  is  the  undue  and  unnecessary  interfer- 
ence of  the  State  with  the  liberty  of  the  individual 
of  which  we  complain. 

The  case  as  presented  so  far  is  incomplete  in  one 
underlying  and  fundamental  particular.  The 
State  not  only  legislates  against  us  overmuch  and 
unwisely  but  it  provides  a  system  of  administra- 
tion under  which  the  companies  are  frequently  de- 
nied the  trial  of  serious  issues  by  the  courts. 


1016 

Commissioners  of  insurance  in  some  States  are 
authorized  to  refuse  to  issue  or  renew  licenses 
whenever  in  their  judgment  the  public  interests 
demand  such  action.  There  may  be  thus  de- 
stroyed, at  a  blow,  prescriptive  rights  and  consti- 
tutional rights  at  the  will  of  an  individual  who  is 
not  clothed  with  the  judicial  ermine,  and  who  may 
not  even  give  to  the  company  affected  a  hearing. 

Commissioners  of  insurance,  again,  are  author- 
ized to  examine  companies  and  to  report  to  the 
public  upon  their  condition.  It  is  conceivable 
that  a  commissioner,  acting  in  all  honesty,  but 
from  ignorance  or  incapacity  may  declare  a  com- 
pany insolvent,  and  thus  bring  about  its  ruin. 

I  have  known  a  case  where  a  given  commissioner 
did  declare  a  company  insolvent  and  did  simul- 
taneously declare  another  company  sound.  He 
mistook  the  facts  both  ways  ;  the  first  company 
was  solvent  and  lived  notwithstanding  his  bull, 
the  second  was  insolvent  and  died. 

I  have  known  a  commissioner  to  embrace  in  a 
report  of  the  examination  of  a  company  an  ar- 
raignment for  dishonesty  of  certain  directors  who 
were  men  of  repute  and  integrity  in  a  notable  de- 
gree and  were  innocent  of  all  offense. 

There  is  a  word  that  fitly  describes  the  practices 
of  the  States  in  the  matter  of  insurance  legislation 
at  large  and  in  this  particular  matter  of  granting 


1017 

undue  powers  to  commissioners.     It  is  "paternal- 
ism." 

Paternalism,  pure  and  simple,  seeks  to  control 
the  citizen  as  if  he  were  incapable  of  self -guidance. 
It  substitutes  the  will  of  an  officer  for  law.  It 
knows  no  courts  saving  itself  and  is  bound  by  no 
precedents.     It  is  placed  by  law  above  law. 

In  its  place  paternalism  is  doubtless  a  good 
thing.  If  one  may  believe  tradition,  paternalism 
prevailed  on  this  continent,  from  one  end  of  it  to 
the  other — prior  to  the  time  of  Columbus.  It 
doubtless  served  a  good  purpose  then.  The  gov- 
ernment of  China  is  paternal.  If  in  the  course  of 
time  that  government  has  become  more  concerned 
about  its  own  prerogatives  than  the  welfare  of  its 
people,  we  may  not  be  surprised,  nor  need  we  say, 
that  the  paternal  system  has  proven  altogether 
vicious  there.  But  in  this  country  paternal  meth- 
ods are  not  popular  and  can  not  long  endure.  If 
it  were  paternalism  pure  and  simple,  with  one  lord 
paramount,  we  might  get  on  more  or  less  well. 
But  we  are  not  let  off  so  easily.  We  are  subject 
to  the  concurrent  rule  of  forty  paternal  establish- 
ments more  or  less.  Do  you  wonder  that  we  poor 
insurance  sinners  and  saints  often  use  the  language 
of  the  Episcopal  ritual,  saying:  "  Good  Lord,  de- 
liver us"  ? 

I  know  of  nothing  likely  to  be  so  effective  to 


1018 

cure  paternalism  in  insurance  legislation  as  the 
study  of  insurance  problems  which  you  are  mak- 
ing. You  are  investigating  these  problems  indi- 
vidually in  your  several  places.  You  are  coming 
together  occasionally  and  discussing  them  in  con- 
cert ;  and  that  no  means  of  information  shall  be 
lacking,  you  have  on  this  occasion  asked  some 
of  us  who  are  interested  in  insurance  enterprises  to 
come  before  you  and  present  our  views.  If  there  is 
merit  in  what  we  present,  I  take  it  for  granted 
that  you  will  perceive  it,  and  thereafter  that  you 
will,  as  behooves  good  citizens  and  officers,  take  up 
the  points  in  order  to  secure  the  abolition  of  bad 
laws  and  the  making  of  better  ones.  You  are  all 
ambitious  to  serve  the  public  interests.  How 
much  could  you  not  do  by  deciding  together  upon 
the  principles  of  the  legislation  needed,  by  promul- 
gating the  same  with  your  endorsement,  and  then  as 
individuals  working  upon  the  legislative  bodies 
of  your  respective  States  to  give  effe(?t  to  them  in 
law? 

But  to  revise  legislation  in  forty  States  will  take 
time,  and  the  situation  demands  an  instant  change, 
which  may  be  brought  about  by  each  one  of  you  of 
his  own  authority,  in  his  jurisdiction.  Let  there 
be  an  abandonment  on  your  part  of  paternal 
methods.  If  you  ask  how  this  may  be  done,  I  an- 
swer briefly — seek  to  make  no  decisions  yourselves 


1019 

of  matters  wMch  can  be  taken  in  any  way  before 
the  courts.  The  threat  to  withdraw  a  license  as  a 
means  of  enforcing  a  view,  your  view,  of  the  law,  is 
an  unworthy  thing.  The  courts  are  present  to  try 
such  issues,  whatever  they  may  be.  No  person, 
and  in  the  category  of  persons  may  properly  be  in- 
cluded for  the  purposes  of  this  argument  insurance 
corporations,  should  be  deprived  of  life,  liberty  or 
property  without  due  process  of  law.  And  process 
of  law  is  not  the  will  of  an  insurance  commissioner, 
of  a  person  clothed  with  a  little  or  much  brief  au- 
thority, it  is  the  process  of  law  known  to  the 
courts.  There  is  not  one  of  you  who  cannot  refuse 
to  be  arbitrary.  If  Washington  and  even  Csesar 
refused  the  kingly  crown,  surely  an  insurance  com- 
missioner may  refuse  to  be  a  despot,  even,  if  that 
shall  be  necessary,  by  laying  down  his  office.  If  a 
man's  proudest  title  in  this  land  is  to  be  an  Ameri- 
can, surely  it  should  be  unworthy  of  an  American 
officer  to  do  things  which  are  un-American  to  the 
last  degree. 

Gentlemen  :  We  insurance  men  love  our  pro- 
fession. We  find  in  it  all  that  a  business  man  at 
large  can  find  to  interest  him.  And  we  find  more. 
We  are  conducting  private  enterprises,  but  they 
are  enterprises  which  involve  in  large  measure  the 
well-being  of  our  fellow-men,  and,  through  them, 
the   well-being   of    the    great   community   of  the 


1020 

American  people.  The  insurance  man  loves  his 
work,  then,  measurably  because  it  is  a  work  of 
philanthropy.  For  you,  guardians  of  the  people, 
the  same  sentiment  must  prevail.  You  are  not 
present  merely  to  spy  out  our  methods,  to  deal  with 
us  with  suspicion,  but,  under  any  right  sense  of 
your  responsibility,  it  should  be  your  chief  work 
to  promote  and  foster  our  work. 

Speaking  for  myself  I  desire  to  add  that  I  ask  at 
your  hands  for  consideration  of  what  I  have  said 
on  the  ground  of  my  own  personal  lack  of  interest, 
from  a  business  standpoint  in  your  conclusions. 
An  old  company  well  established  can  sustain  al 
the  evils  which  I  have  depicted.  It  may  indeed 
have  a  broader  field  because  of  the  restrictive 
legislation  which  prevents  freedom  in  the  forma- 
tion of  new  companies  and  makes  the  success  of  all 
more  difficult.  However  this  may  be  I  have 
talked  to  you  the  truth  as  I  see  it. 

And  in  talking  to  you  the  truth  as  I  see  it,  I  do 
so  with  sincere  respect  for  your  organization  and 
for  you  as  individuals.  From  the  beginning  of  my 
insurance  career  until  now  I  have  relied  upon  in- 
surance departments  for  fair  dealing  and  a  helpful 
disposition.  In  doing  so,  I  have  seldom  been  dis- 
appointed. When  differences  have  occurred,  or 
when  it  has  seemed  to  be  that  the  course  of  a  given 
commissioner  has  been  inconsiderate.  I  have   en- 


1021 

deavored  to  extend  to  the  individual  that  charity 
for  which  all  of  us  stand  in  need,  remembering  in 
particular  that  the  field  of  administration  is  new, 
and  that  much  time  will  be  required  for  the  deter- 
mination of  those  methods  which  will  best  con- 
serve the  various  interests  involved. 


^ 


INSURANCE  AND  THE  LEGISLATOR. 

JULIUS  E.  ROEHR  : 

AUTOCRATIC  power,  absolute  dominion  over 
others  and   their  affairs,  their  persons  and 
property,  history  pictures  as  a  concomitant  of  bar- 
barism founded  on  ignorance  and  superstition.     It 
flourished  thousands  of  years.     However,  intellec- 
tual development,  advancing  civilization,  made  con- 
stant inroads  upon  this  privilege.     Abuse  of  power 
caused  reflection.     Reflection  a  determination  to 
compel  recognition  of  elementary  rights.     Kings 
were  shorn  of  Godly  attributes.     Following  this 
success  came  advances  upon  their  worldly  power,  and 
finally  the  people  again  recovered  what  they  had 
originally  possessed — the  right  of  self-government. 
We  still  have  kings,  but  they  are  in  many  instances 
the  creatures  of  representative  bodies  and  a  con- 
stitution.    In  the  United  States  the  Constitution  is 
the  fountain  head  and  source  of  legislative  power 
and  governmental  function.     From  its  source  flows 
the  only  stream  which  moves  the  legislative  ma- 
chinery, and  all  legislative  acts  are  offsprings  of 


1023 

this  power.  Its  provisions  have  been  strictly  up- 
held by  the  highest  judicial  tribunals.  Legisla- 
tures offending  its  word  or  spirit  have  found  their 
acts  speedily  annulled.  For  over  one  hundred 
years  it  has  stood,  the  bulwark  of  the  freedom  and 
liberty  of  our  people.  While  framed  for  the  gov- 
ernment of  but  a  few  States,  with  a  comparatively 
small  population,  it  has  been  found  sufficiently 
broad  for  the  government  of  forty-five  States,  with 
a  population  of  about  70,000,000.  It  is  the  admira- 
tion of  every  student  of  history.  The  wisdom  of 
its  founders  will  continue  to  be  revered  by  future 
generations. 

Pursuant  to  the  plan  of  this  Constitution,  legis- 
lative functions  are  exercised  by  representative 
bodies  of  each  State,  now  to  the  number  of  forty- 
five.  They  all  enjoy  the  right  to  legislate  on  many 
subjects,  concerning  which  the  right  has  not  been 
reserved  to  itself  by  Congress.  W  hile  the  States 
are  coherent  and  form  a  union  of  unrivaled  power 
and  strength,  each  State  acts  independent  of  the 
other  in  legislation.  The  acts  of  each  govern  and 
control  within  the  limits  of  each  State.  The  result 
is  in  many  cases  widely  divergent  laws  on  the  same 
subject  in  each  State.  In  nearly  all  instances  ex- 
perience has  demonstrated  that  this  is  unwise.  A 
great  number  of  important  questions  have  arisen 
in  which  the  laws  of  different  States  conflict.     It  is 


1024 

often  a  difficult  matter  to  determine  which  law  ap- 
plies to  a  given  case.  Judges  and  jurists  have  been 
puzzled  to  determine  the  effect  of  the  laws  of  one 
State  upon  a  person  or  his  property  rights  in 
another  State.  On  the  subjects  of  "divorce"  and 
*'  bankruptcy  "  a  view  of  the  differing  laws  of  forty- 
five  distinct  States  gives  the  looker-on  a  kaleido- 
scopic picture.  The  difficulty  mentioned  has  given 
rise  to  many  decisions  under  the  branch  of  law 
known  as  "  Conflict  of  Laws,"  and  the  private  in- 
ternational relations  of  the  States  of  the  Union 
have  been  the  theme  of  many  learned  treatises. 
As  important  as  either  of  these  two  matters  is  the 
subject  of  insurance.  Thirty-seven  years  ago,  at 
the  outbreak  of  the  Civil  War,  sixteen  life  insur- 
ance companies  of  the  United  States  had  in  all 
56,046  policies  in  force,  representing  $163,703,455 
of  insurance.  To-day  it  is  estimated  that  the  pol- 
icies carried  in  this  country  number  nearly  14,000,- 
000  representing  $15,000,000,000.  These  great  in- 
terests have  not  in  general  been  accorded  the 
attention  they  deserve.  Few  understand  the  sci- 
ence of  insurance.  Principally  insurance  compan- 
ies or  those  affected  by  some  oppressive  act  on  the 
part  of  the  company,  have  interested  themselves 
in  insurance  legislation.  It  has  now,  however, 
come  to  be  recognized  as  a  question  demanding  the 
most   conscientious   and    careful    study  and   the. 


1025 

greatest  consideration  on  the  part  of  the  people's 
representatives.     Insurance  interests  have  grown  so 
large,  so  important,  that  legislators  can  no  longer 
close  their  eyes  to  a  subject  so  vital  to  the  people 
and  important  to  the  State.     The  first  remarkable 
fact  which  strikes  one  investigating  insurance  leg- 
islation, is  the  deplorable  condition  of  the  laws  of 
different  States  of  the  Union  with  regard  to  uni- 
formity.    That  companies,  who  have  to  a  great 
extent  influenced  legislation  throughout  the  United 
States,  have  permitted  this  state  of  affairs  to  arise 
is  of  itself  surprising.     That  legislatures  should 
act   without  any  regard  to  the  laws  of  another 
State  on  this  subject  is  not  at  all  surprising.     It 
may  be    taken  for    granted,    and  I  say  it  with 
a   firm    belief    in    the    truth    of    the    statement, 
that    the    percentage  of    members   of   any  legis- 
lature with  a  knowledge  of  insurance  matters  is 
very  minute.     We  enact  a  law  in  Wisconsin  and 
say  to  foreign  companies,   "Come  in  if  you  will, 
but  conform  to  this  law. ' '     Another  State  passes  a 
law  and  imposes  the  same  or  some  other  condition 
on  Wisconsin  companies.     Neither  State  legisla- 
ture attempts  in  any  manner  to  conform  these  laws 
to  one  another.     This  has  resulted  in  the  enact- 
ment of  the  most  mischievous  of  all  ^insurance 
legislation  known  as  "  Retaliatory  Laws."     These 
were  enacted  to  be  used  by  the  legislature  of  one 


1026 

State  as  a  lever  upon  the  legislature  of  the  other. 
The  intended  purpose  was  that  where  the  law  of 
some  other  State  imposes  additional  requirements 
or  charges,  greater  than  those  charged  in  this  State, 
then  such  additional  charges  and  conditions  shall 
be  imposed  on  companies  whose  domicile  is  in  an- 
other State  who  propose  to  do  business  here.  The 
operation  of  this  class  of' laws  is  universally  con- 
ceded to  be  detrimental  to  the  interests  of  com- 
panies and  their  patrons  alike.  Retaliatory  laws 
should  be  repealed. 

A  cardinal  principle  in  insurance  is  that  the  in- 
sured pays  not  only  the  amount  necessary  to  se- 
cure the  payment  of  his  insurance.  He  pays  the 
expenses  of  procuring  the  insurance  from  him,  he 
pays  the  salaries  of  the  officers,  the  rent  and  ex- 
penses of  the  company,  and  he  also  pays  all  the 
taxes,  charges  and  fees  which  are  imposed  on  the 
company  by  the  State.  The  insurance  company 
actually  pays  nothing,  for  they  simply  act  as  the 
medium  between  the  policy-holder  and  the  State. 
As  to  charges  and  fees  demanded  by  the  State, 
they  act  practically  as  tax  collectors.  While  this 
is  elementary,  I  believe  it  to  be  a  fact  which  but 
few,  except  those  who  are  directly  interested,  have 
considered  or  really  understand.  The  conclusion 
from  this  fact  is  that  every  tax  or  fee  levied  against 
an  insurance  company  is  simply  a  tax  in  reality 


1027 

against  the  insurer.  The  difference  between  this 
and  the  method  of  ordinary  taxation  is  that  in  one 
case  the  State  collects  the  tax  directly,  in  the  other 
case  the  company  collects  it  for  the  State.  Want 
of  uniformity  in  laws  in  the  different  States  has 
undoubtedly  contributed  to  increased  expenses  for 
the  insurer.  The  first  step  in  the  direction  of  bet- 
ter insurance  legislation  is  uniformity  of  law  gov- 
erning insurance  companies  in  the  different  States. 
A  convention  of  insurance  commissioners,  repre- 
senting all  the  States  of  the  Union,  ought  to  be  a 
powerful  means  of  attaining  this  object.  Who,  ex- 
cept a  lawyer  when  thereunto  duly  retained,  ever 
attempts  to  know  anything  concerning  the  insur- 
ance laws  of  another  State,  unless  it  be  the 
insurance  commissioner  ?  The  latter  is  daily 
in  contact  with  companies  of  his  own  and 
other  States.  He  is  at  the  head  of  the 
insurance  department,  whose  business  it  is 
to  protect  insurers  in  his  State  from  imposition 
and  fraud.  To  do  this  effectually,  he  must,  above 
all  things,  have  a  thorough  knowledge  of  insurance 
laws  throughout  the  United  States.  To  him  and 
his  department  all  classes  of  people  appeal  for 
instruction  and  help.  ISTo  doubt  that  he  can 
direct,  form  and  shape  the  legislation  of  his  State 
to  a  considerable  extent.  Gathered  here  at  this 
time  are  nearly  all  the  insurance  commissioners  of 


1028 

the  United  States,  and  united  effort  by  tliem  in 
their  different  jurisdictions  could  be  of  great  ben- 
efit. Legislators  should  regard  the  proceedings  of 
this  convention  as  authoritative.  In  Wisconsin  we 
have  the  good  fortune  of  possessing  an  insurance 
commissioner  who  has  made  admirable  effort  to 
convince  the  legislature  of  the  soundness  of  this 
proposition.  If  his  energy  has  not  been  imme- 
diately fruitful,  there  is  no  question  but  what  he 
has  aroused  public  interest  to  a  high  degree,  which 
cannot  but  result  in  great  benefit  in  the  future. 
The  American  Credit  Men's  Association,  by  con- 
certed action  in  annual  conventions,  followed  by 
united  effort  at  home,  succeeded  in  comparatively 
few  years  in  obtaining  the  enactment  of  local 
voluntary  and  involuntary  bankruptcy  laws  uni- 
form in  many  of  the  States.  Involuntary  bank- 
ruptcy was  unknown,  except  by  national  legisla- 
tion, until  the  Credit  Men's  Association  took  hold 
and  directed  its  introduction  in  the  several  parts 
of  the  United  States.  To  their  efforts  is  due  the  re- 
cent enactment  of  a  National  Bankrupt  Law.  The 
success  of  this  body  of  men  ought  to  encourage  a 
convention  of  insurance  commissioners  in  the  work 
of  obtaining  uniformity  of  legislation  concerning 
insurance.  They,  the  credit  men,  had  one  great  ad- 
vantage— their  interest  in  those  questions  is  continu- 
ous.    The  interest  of  an  insurance  commissioner  is 


1029 

liable  to  expire  with  his  office,  and  the  great  ob- 
stacle in  the  way  of  continuous  interest  in  the 
great  questions  of  insurance  on  the  part  of  an 
insurance  commissioner  is  uncertainty  in  the  ten- 
ure of  his  office.  While  it  may  seem  presumptuous 
on  the  part  of  insurance  commissioners  to  advocate 
the  abolition  of  the  elective  features  of  their  office, 
yet,  in  vieAv  of  the  great  benefit  to  be  derived,  all 
insurance  commissioners  should  unhesitatingly  ad- 
vocate the  appointment  instead  of  the  election  of 
incumbents  of  that  office.  They  should  hold  office 
subject  to  removal  by  the  Governor  of  any  State 
for  cause  until  age  or  disease  has  destroyed  their 
usefulness.  An  insurance  commissioner  may  be  an 
ideal  one,  thorough  in  his  understanding  of  the 
science,  strong  and  inflexible  in  carrying  out  the 
provisions  of  the  law,  honest  and  upright  in  the 
discharge  of  all  his  important  duties.  He  may 
during  his  short  term,  which  in  most  cases  does  not 
exceed  two  years,  be  able  by  untiring  labor  to 
achieve  marked  beneficial  changes.  If  his  political 
pull  is  not  strong  enough  to  obtain  re-election  or 
re-appointment,  some  other  commissioner  is  substi- 
tuted. Unless  he  is  an  expert,  it  will  require 
many  months  of  careful  and  constant  study  to 
familiarize  himself  with  the  laws  affecting  his  de- 
partment. His  term  expires  to  introduce  another, 
and  his  successor  makes  the  same  journey. 


1030 

I  had  the  pleasure  of  being  a  member  of  the 
Committee  in  Insurance  of  the  Wisconsin  Legisla- 
ture of  1897.  My  brief  experience  there  convinced 
me  that  the  present  system  of  electing  insurance 
commissioners  was  folly.  The  interests  affected 
are  so  vast,  the  laws  governing  them  so  diverse, 
the  science  of  insurance  so  advanced,  that  none  but 
an  expert  could  safely  traverse  this  important 
subject.  To  one  inexperienced,  with  but  little 
knowledge  of  what  is  at  stake,  with  less  knowledge 
of  the  laws  governing,  with  inadequate  conception 
of  the  science  of  insurance,  it  is  like  embarking 
upon  an  unknown  sea  without  a  guide,  pilot  or 
a  compass.  The  head  of  an  insurance  department 
of  any  of  the  great  States  of  this  Union,  ought  to 
be  a  skilled  expert,  selected  because  of  his  ability 
and  genius  and  not  the  caprice  of  a  political  con- 
vention or  the  present  favorite  of  the  appointing 
power.  He  ought  to  be  retained  at  an  adequate 
remuneration  and  there  can  be  no  question  but 
what  the  price  of  his  services  would  be  saved  over 
and  over  again  in  a  few  short  years.  This,  then, 
should  be  one  of  the  prime  objects  of  the  legisla- 
tor :  To  constitute  insurance  commissioners  and 
their  departments  institutes  of  permanence  and 
not  fitful  objects  of  political  fancy.  Again,  there 
is  no  doubt  but  that  so  constituted,  unanimity  of 
effort  on  their  part  would,  beyond  peradventure, 


1031 

result  in  the  correction  of  many  existing  evils. 
Their  position  in  the  govermental  machinery  would 
be  much  more  important  than  it  now  is,  and  sug- 
gestions and  advice  emanating  from  such  a  source 
would  be  received  by  the  legislator  not  only  with 
greater  consideration,  but  also  without  suspicion. 
One  of  the  primary  matters  to  be  kept  in  mind  is 
the  security  of  the  policy-holder.     The  company  is 
usually  managed  by  astute  and  able  men,  who  are 
paid  high  salaries  in  consideration  of  their  valu- 
able services  to  the  company :    they  take  care  of 
the  company's  interests.     To  the  legislator  are  con- 
fided the  interests  of  the  policy-holder  ;  to  protect 
them  intelligently  is  the  problem  presenting  itself 
to  him.     When  the  great  interests  involved  are 
considered,  it  is  exceedingly  strange  that  in  these 
modern  times  there  is  a  class  of  insurance  which  is 
permitted  to    exist  without    regulation    assuring 
safety  to  the  policy-holder.     The  amendment  of 
existing  laws  on  this  subject  is  imperative.     Few 
realize  the  disaster  which   constantly  results  by 
reason  of  the  operation  of  sepulchral  insurance 
schemes.     The  facts  regarding  dishonest  companies 
ought  to  be  constantly  held  up  to  the  legislator 
until  relief  is  granted.     It  is  astonishing  to  con- 
template this  situation.     There  are  135  companies, 
associations  and  organizations  licensed  to  transact 
the  business  of  life  insurance  and  reporting  to  the 


1032 

Wisconsin  insurance  department,  for  twenty-six  of 
which  only  the  law  fixes  a  standard  of  solvency. 
Why  this  discrimination  ?    Why  should  not  every 
company  or  association,    receiving  money  of  the 
people  for  investment  and  return,  be  compelled  by 
law  to  so  arrange  its  plan  and  method  of  doing 
business  that  the  policy-holder  need  not  be  appre- 
hensive of  failure  of  the  company  ?  Here  again  the 
legislator  is  charged  with  a  great  responsibility. 
The  interests  of  the  people — his  constituents,  de- 
mand that  he  insist  upon  honesty  on  the  part  of 
insurance   companies,    associations    and    organiza- 
tions who  are  permitted  to  organize  by  the  State. 
It  is   certainly  reprehensible   on  the  part  of  the 
government    to    grant    a   charter  to    a    company 
which   permits  it   to   defraud    the  public.      This 
proposition    sounds    startling,    but    in    many    in- 
stances   it    is    done.       Insurance    companies    are 
permitted    to    exist    under    a    plan    which    has 
stamped    upon    its    face    the    seal    of    a    speedy 
death.     Insurance,  without  a  required  standard  of 
solvency,  is  the  bane  and  striking  evil  of  the  pres- 
ent day.     It  is  a  wrong  which  finds  exj)ression  in 
thousands  of  wails  from  unfortunate  policy-hold- 
ers when  disaster  riddles  the  bauble.     The  best 
part  of  a  life,  the  productive  period,  is  spent  in 
contributing  to  a  fund  which  knows  no  reserve. 
The  time  arrives  when  assessments  become  so  large 


1033 

that  they  cannot  be  paid  ;  one  after  another  ceases 
to  be  a  member,  then  comes  the  death.  The  policy- 
holder has  arrived  at  an  age  when  he  cannot  gain 
admission  or  purchase  insurance  elsewhere  and  all 
his  savings  are  gone.  He  has  lost  his  money  and 
his  insurance  ;  and  all  this  with  the  consent  and 
approval  of  the  legislator. 

The  promoter  of  assessment  companies  is  found 
in  the  halls  of  the  capitol.  His  smooth,  plausible 
representations  find  a  ready  ear  with  the  unsophis- 
ticated member,  and  being  the  only  one  on  the 
ground,  he  is  altogether  too  often  successful  in 
avoiding  legislation  compelling  his  company  to  be 
honest.  In  the  legislative  session  of  Wisconsin  of 
1897  it  was  attempted  to  establish  a  standard  of 
solvency  for  this  line  of  insurance  and  to  require 
every  order  and  company  doing  business  upon  this 
plan  to  conform  to  it.  Strange  to  say,  repre- 
sentatives of  these  companies  were  sent  to  Madison, 
Wisconsin,  to  defeat  the  effort.  By  using  unwar- 
ranted arguments,  by  maligning  the  motive  which 
prompted  the  proposed  legislation,  by  vicious  at- 
tack upon  the  law  and  its  author,  they  succeeded 
in  arousing  a  prejudice  and  hostilty  which  was 
amazing,  and  succeeded  in  defeating  the  measure. 
The  following  was  substantially  the  provision  : 

"  The  Commissioner  of  Insurance  shall  annually 
value,  according  to  the  actuaries'  table  of  mortal- 


1034 

ity,  with  interest  not  exceeding  four  per  cent.,  the 
policies  of  all  life  insurance  companies  and  asso- 
ciations organized  in  this  State,  and  of  all  life 
insurance  companies  and  associations  of  other 
States  authorized  to  transact  business  in  this  State, 
unless  a  certificate  of  such  valuation  by  the  insur- 
ance commissioner  of  such  other  State  is  annually 
furnished  before  license  to  transact  business  in  this 
State  is  granted,  and  whenever  the  actual  funds  of 
any  such  company  or  association  are  not  of  a  net 
value  equal  to  the  net  value  of  its  policies  so 
calculated,  the  company  or  association  shall  be 
prohibited  from  issuing  any  new  policies  while 
such  deficiency  exists,  and  the  Commissioner  of 
Insurance  shall,  if  necessary,  issue  an  order  upon 
the  company  or  association  to  make  good  such  de- 
ficiency by  an  assessment  upon  its  policy-holders. 
The  Commissioner  of  Insurance  shall  immediately 
revoke  the  license  of  any  life  insurance  company 
or  association  failing  or  refusing  to  comply  with 
any  of  the  provisions  of  this  section." 

This  provision  is  one  which  should  speedily  be 
enacted  into  a  law.  It  is  a  matter  of  congratula- 
tion that  fraternal  and  assessment  companies  are 
beginning  to  understand  the  necessity  of  doing 
business  on  sound  business  principles  and  that 
future  regulations  of  this  kind  will  not  meet  with 
as  much   opposition  as  they  have  in   the  past. 


1035 

This  is  one  of  the  most  important  subjects  for  the 
consideration  of  the  legislator.  When  the  time 
arrives  at  which  a  member  of  such  an  association 
finds  himself  tricked  out  of  his  insurance,  he  nat- 
urally inquires,  Why  does  the  law  permit  this 
thing  ?  Why  am  I  not  protected  as  well  as  my 
neighbor  ?  What  answer  can  be  made  ?  This  mat- 
ter should  be  constantly  agitated  until  relief  comes. 
Regulative  statutes  have  taken  wide  scope  in  recent 
years.  The  public  is  protected  from  adulterated 
foods,  quack  doctors,  illiterate  plumbers  and  un- 
skilled tonsorial  artists.  How  trivial  some  of  these 
interests  are  compared  to  the  one  under  consider- 
ation ;  and  yet,  here  there  is  no  protection.  This 
offers  a  great  opportunity  to  the  statesman.  He 
who  will  succeed  in  enacting  and  enforcing  reason- 
able provisions,  insuring  the  safety  of  the  investor, 
will  erect  an  everlasting  monument  for  himself  and 
reap  deserved  encomiums  from  future  generations. 
To  the  observer  and  student  of  insurance,  there 
is  another  striking  feature  which  it  seems  to  me 
calls  for  regulation, — namely,  the  expense  of  man- 
agement in  mutual  and  stock  life  companies.  It 
may  be  said  at  the  outset,  that  policy-holders  in 
mutual  companies,  all  having  a  vote,  are  them- 
selves responsible  for  the  management  of  the  com- 
pany. However,  a  proxy  vote  is  usually  one  for 
the  management.     If  some  means  could  be  devised 


1036 

* 

to  obtain  a  direct  vote  upon  questions  affecting  the 
management  of  an  insurance  company,  the  results 
undoubtedly  would  be  beneficial ;  but  until  that  is 
done  there  is  not  likely  to  be  a  change.  Some  in- 
surance companies  have  grown  to  such  vast  pro- 
portions that  they  are  quasi  public  corporations. 
Their  affairs  are  so  large  as  to  encompass  the  inter- 
est of  thousands  of  citizens.  The  State  has  not 
only  the  right,  but  the  duty  to  protect  them. 
These  great  corporations  are  managed  by  officers 
elected  by  proxy  votes.  They  all  make  creditable 
showings.  They  compete  in  paying  dividends. 
But  I  am  of  the  opinion  that  in  general,  expenses 
of  management  are  altogether  too  high  and  that 
more  should  be  returned  to  the  policy-holder.  All 
insurance  companies  should  be  compelled  to  make 
public  itemized  statements  of  expenses.  Expendi- 
tures of  other  public  and  quasi  public  corporations 
are  required  to  be  itemized  and  published  and  can 
easily  be  found.  Not  so  in  the  case  of  an  insur- 
ance company.  The  required  publication  would 
lead  to  reform  in  management  and  perhaps  an  ap- 
preciable reduction  of  expenses  making  insurance 
cheaper.  Does  any  policy-holder  of  tire  or  life  in- 
surance know  what  percentage  of  the  premium  he 
pays  is  used  by  the  company  for  expenses  ? 

It  occurs  to  me  that  it  would  be  wise  to  compel 
the  insurance  companies  to  state  on  the  face  of 


1037 

each  policy  in  plain  print  the  exact  amount  or  part 
of  the  annual  premium  to  be  used  for  expenses  and 
thus  make  it  part  of  the  contract.  The  result 
would  unquestionably  lead  to  competition  in  the 
reduction  of  expenses  by  the  companies.  Every 
policy-holder  would  have  accurate  information  on 
the  subject. 

In  life  insurance  also  individual  accounts  should 
be  kept  with  each  policy-holder  and  his  account 
credited  with  the  amount  paid  by  him  and  charged 
with  the  respective  items  of  indemnity,  reserve  and 
expense.  Upon  application,  certified  copies  of  his 
account  should  be  furnished.  I  believe  some  such 
system  is  in  vogue  in  every  bank,  building  and 
loan  association  or  investment  company.  Why 
not  in  insurance  corporations  ? 

It  has  often  occurred  to  me  that  the  accumula- 
tion of  this  enormous  surplus  is  entirely  unneces- 
sary and  unwarranted.  Insurance  is  often  solicited 
and  induced  by  the  showing  of  a  large  surplus  as 
though  the  policy-holder  was  to  derive  some  bene- 
fit from  it.  But  a  policy-holder  is  not  a  stockr 
holder.  The  policy-holder  will  be  awarded  what 
his  contract  calls  for.  Dividends  or  shares  of  sur- 
plus profit  are  only  estimates.  They  are  not  his  as 
a  matter  of  right,  but  he  receives  them  by  the  good 
grace  of  the  company.  Of  course,  companies  com- 
pete in  the  payment  of  dividends.     But  it  seems  to 


1038 

be  a  mutual  understanding  to  retain  a  very  sub- 
stantial addition  to  the  surplus.  Many  companies 
could  wind  up  their  business  to-day  and  have  mill- 
ions over  for  distribution  among  the  stock,  not 
policy-holders  or  those  policy-holders  in  strictly 
mutual  companies  possibly,  whose  policies  are  in 
force,  not  having  been  paid  up  and  surrendered. 
What  is  to  become  of  it  ?  Who  owns  it  ?  When 
is  it  clearly  understood  that  this  ' '  surplus ' '  means 
over  payments  on  the  part  of  the  policy-holders  and 
interest  earning  over  and  above  that  necessary  to 
maintain  the  reserve, —that  it  seldom  or  never 
represents  a  saving  from  the  expense  element,  the 
legislator  will  not  seek  far  for  the  remedy. 

For  whom  is  this  surplus  being  accumulated? 
In  the  recent  case  of  Greef  vs.  The  Equitable  Life 
Assurance  Society  of  the  United  States,  decided  in 
New  York,  it  was  held  that  under  the  charter  of 
the  defendant,  the  statutes  of  New  York 
and  the  terms  of  the  policy  issued  to  the 
plaintiff  that,— the  defendant  company  was 
not  liable  in  an  action  at  law  for  an  unde- 
clared dividend  or  share  of  the  surplus  profits 
of  the  defendant  company  over  and  above  the 
amount  of  his  policy  and  certain  additions,  to  the 
accumulation  of  which  had  been  devoted  his  annual 
dividends  or  share  of  the  surplus  profits  as  allotted 
to  him  by  the  company.     The  court  was  of  the 


1039 

opinion  that  whether  an  insurance  company  can 
lawfully  exact  such  a  contract  as  was  exacted  from 
the  plaintiff  is  a  question  between  the  company  and 
the  State  from  which  it  derives  its  charter,  and  that 
it  would  seem  that  no  such  question  can  arise  be- 
tween the  company  and  its  policy-holders,  who  are 
under  no  compulsion  to  make  the  contract.  "In 
the  case  of  a  stockholder,  whether  a  dividend  be 
declared  or  not,  he  remains  the  owner  of  an  inter- 
est which  increases  in  value  by  the  surplus  accumu- 
lated ;  and  such  surplus,  by  ultimate  distribution, 
will  be  shared  by  him.  But  the  policy-holder  has 
no  share  or  interest  which  increases  in  market 
value  by  the  accumulation,  and,  as  his  account 
with  the  company  is  closed  by  the  payment  and 
surrender  of  his  policy,  his  right  to  a  share,  if  any, 
of  its  funds  must  be  determined  without  reference 
to  the  rules  which  govern  the  continuing  relations 
of  a  stockholder  with  his  company. ' '  The  attention 
of  the  law-maker  should  be  directed  to  this  ques- 
tion. The  power  of  the  company  to  accumulate  a 
surplus  at  will  should  be  curbed.  The  maturing 
policies  should  be  accorded  their  proper  and  rea- 
sonable share  of  the  earnings.  Legislation  on  this 
line  would  leave  the  safety  of  the  company  unim- 
paired, yield  the  policy-holder  a  larger  return  and 
thus  cheapen  insurance.  The  blessings  of  safe 
and  cheap  insurance  will  be  most  effectually  be- 


1040 

stowed  by  bringing  it  within  the  reach  of  all  the 
people. 

It  should  be  impressed  upon  the  mind  ol'  the 
legislator,  that  insurance  in  its  proper  sense  means 
indemnity  ;  that  in  this  realm  the  doors  should  be 
absolutely  closed  to  speculation  ;  that  it  is  not  the 
proper  sphere  for  speculative  investments.     Laws 
governing    insurance  should  be  so  framed    that 
speculative    schemes    become     impossible, — they 
lead  to  risky   investments  with   many  disasters. 
Clean,  straight  indemnity  is  the  only  safe  insur- 
ance.    In  granting  charters  to  insurance  companies, 
stringent  requirements  should  be  made  to  ensure 
stability.     There  should  be  a  standard  of  solvency 
for  every  class  of  insurance.     No  kind  of  insurance 
should  be  tolerated  without  such  a  standard  and 
this  should  be  strictly  enforced  no  matter  under 
what  plan  the   company  be  organized.     In   fact, 
the  distinguishing  feature  of  all  legislation  on  the 
subject  of  insurance  should  be  safety.     The  present 
system  of  examining  insurance  companies  might  be 
much  improved.   It  has  recently  developed  that  even 
insurance  commissioners  are  human  and  that  over- 
examination  is  a  possibility.     Examinations  of  in- 
surance companies  are  made  for  the  purpose  of 
establishing    their    soundness.     Pursuant  to    the 
laws  of  the  different  States,  an  insurance  commis- 
sioner may  refuse  admission  to  his  State  if  of  the 


1041 

opinion  that  the  company   applying  is  unsound. 
This  is  eminently  a  power  vested  in  him  for  the 
benefit  of  the  people  of  his  State.    In  order  to  de- 
termine the  soundness  of  an  insurance  company^ 
the  insurance  commissioner,  if  he  desires  personal 
knowledge  on  the  subject,  must  make  an  examina- 
tion of  its  affairs.     This  entails  expense.     He  must 
have  assistance  which  increases  the  expense.     The 
practice  has  been  for  the  companies  to  pay  the 
price  of  such  an  examination.     After  admission  of 
the  company  into  the  State,  it  becomes  discretion- 
ary with  the  commissioner  to  re-examine  the  com- 
pany whenever  in  his  Judgment  it  may  be  proper 
so    to    do.     Here    is  a  temptation   which    might 
prompt  an  over-zealous  commissioner  to  examine 
with  a  vengeance.     This  method  is,  in  my  opinion, 
easily  reformed  by  an  enactment  providing  that  in 
each  State  the  insurance  commissioner  shall  be  re- 
quired to   make   periodical   examinations   of    his 
home  companies.     Such    enactment    should    also 
provide  that  the  expense  be  paid  by  the  State, 
since  it  is  a  matter  which  goes  to  the  safety  of  the 
investments  of  the  citizens  of  the  State.     The  cus- 
tom of  the  company  paying  for  such  examination 
is  one  which  is  not  only  unjust  and  absurd,  but 
dangerous.     It  has  upon  its  face  the  appearance  of 
a  certificate  of  solvency   exchanged  for  so  muchi 
cash.     The  reports  of  each  commissioner  should  be 


1042 

filed  in  his  office  and  a  certiiied  copy  furnished  to 
the  Commissioner  of  each  State  in  which  tlie  com- 
pany transacts  business.  A  company  applying 
under  such  a  law  to  do  business  in  any  particular 
State  should  be  admitted,  all  other  requirements 
having  been  fulfilled,  upon  the  certificate  of  the 
Insurance  Commissioner  of  its  home  State,  certify- 
ing that  such  examination  has  been  made,  tiiat  the 
company  has  been  found  solvent,  accompanied  by  a 
copy  of  the  last  report  of  the  home  insurance  com- 
missioner. Under  such  a  system  the  certificate  of 
the  Commissioner  should  be  a  guarantee  to  every  in- 
surance commissioner  of  the  soundness  of  the  com- 
pany. Haphazard  examinations  by  commissioners 
and  their  assistants,  traveling  long  distances  at  the 
company's  expense,  would  disappear.  Besides  ac- 
complishing satisfactory  results  concerning  the 
soundness  of  a  company,  it  would  tend  to  cheapen 
insurance  by  reducing  expenses.  A  compilation 
of  the  amount  annually  paid  by  insurance  com- 
panies for  examination  fees  would  be  interesting. 
I  have  not  been  able  to  find  one,  but  the  total 
amount  must  be  considerable  and  is  undoubtedly 
considered  in  calculating  the  cost  of  insurance. 

Insurance  should  be  made  cheaper  as  well  as 
safer.  In  all  classes  of  insurance  the  expense  of 
conducting  the  business  largely  affects  th«  amount 
of  the  cost.     Other  causes  sometimes  create  higher 


1043 

prices.  In  fire  insurance,  serious  conflagrations 
sometimes  influence  local  premiums.  It  is  gener- 
ally claimed  that  the  cost  of  insurance  is  excessive ; 
that  the  insurance  companies  are  reaping  large  and 
unwarranted  profits  ;  that  if  insurance  was  sold  at  a 
fair  and  reasonable  figure  the  rates  should  be  de- 
creased at  least  twenty  to  twenty-five  per  cent. 
As  in  other  cases  of  real  or  imaginary  shortcomings 
of  the  company,  the  legislator  is  appealed  to  for 
relief  and  the  problem  is  how  to  decrease  the  cost 
without  endangering  the  security  of  the  insurer,  or 
what  is  equivalent  thereto— the  safety  of  the  com- 
pany. The  first  inquiry  to  be  made  is  as  to  how 
the  insurance  premium  is  arrived  at  and  to  deter- 
mine what  items  are  considered  and  calculated 
which  go  to  make  up  the  whole  amount.  In  fire 
insurance  the  want  of  an  experience  table  leaves 
the  amount  to  be  charged  for  the  risk  to  the  ex- 
perience of  a  single  company  or  judgment  and 
opinion  of  the  underwriter.  After  that  amount  is 
determined,  a  certain  amount  is  added  for  reserve 
and  an  addition  is  made  for  the  expense  of  procur- 
ing the  insurance  and  the  management  of  the 
company.  Commissions  paid  in  fire  insurance  are 
excessive.  The  amount  thus  paid  to  agents  on  fire 
insurance  in  the  United  States  is  enormous  and  the 
injustice  of  it  will  appear  by  a  very  simple  exam- 
ple.    We  will  take  an  insurance  policy  upon  which 


1044 

the  annual  premium  is  $100.00.  Suppose  the  agent 
is  paid  twenty  per  cent,  which  will  be  $20.00.  In 
ten  years  the  agent  would  receive  $200.00  or  two 
years'  premiums.  This  is  certainly  an  injustice  to 
the  insurer,  for  it  is  he  who  pays  this  commission. 
The  general  idea  is  that  the  company  pays  the 
agent  who  solicits  the  insurance,  but  that  is  a  de- 
lusion. The  insurer  pays  the  premium,  the  agent 
who  collects  it  deducts  his  commission,  the  balance 
goes  to  the  company.  Who  then  pays  the  com- 
mission ?  Insurance  companies,  unless  by  agree- 
ment, have  no  uniform  rate  and  are  always  com- 
peting for  business  and  so  commissions  are  often 
regulated  by  the  class  or  grade  of  the  risk.  First- 
class  risks  yield  the  agent  first-class  commissions 
and  as  a  class  or  risks  are  graded  downward  the 
commission  follows.  There  is  no  doubt  but  what 
this  item  of  agents'  commissions  contributes  to- 
wards the  cost  of  insurance  and  increases  it  by  at 
least  twenty  per  cent.  If  the  commissions  paid  to 
agents  could  be  reduced  to  a  fair  and  reasonable 
amount,  such  a  reduction  would  unquestionably 
accomplish  a  large  saving  and  make  fire  insurance 
cheaper.  Of  course,  the  agents  would  oppose  such 
a  movement,  but  I  firmly  believe  that  the  insurance 
companies  would  welcome  the  change,  providing  it 
could  be  made  binding  upon  all  companies  and  the 
rates  made  uniform,  for  making  insurance  cheaper 


1045 

it  would  make  it  more  popular.  The  commissions 
now  paid,  I  believe  the  companies  will  concede,  are 
extravagant  and  here  we  have  located  one  of  the 
items  which  cause  some  of  the  trouble.  It  would 
be  useless  to  suggest  a  compact  among  the  com- 
panies to  limit  or  modify  the  amounts  paid  for 
agents'  commissions.  Compacts  of  that  nature  are 
made  only  to  be  violated.  Pools  or  agreements  in 
that  direction  are  for  the  most  part  successful 
tempters.  Temptation  lurks  in  every  line  of  a  pool 
contract.  The  law-maker  can  afford  a  remedy 
which  will  cure  the  evil,  and  I  suggest  the  enact- 
ment of  a  law  providing  that  it  shall  be  a  misde- 
meanor to  pay  or  receive  more  than  fifteen  per  cent, 
of  a  lire  insurance  premium  for  an  agent's  commis- 
sion. I  incline  to  the  conviction  that  the  cost  of 
insurance  would  thereby  be  reduced  at  least  fifteen 
per  cent.  Another  manner  in  which  fire  insurance 
could  be  cheapened  would  be  to  issue  long  term 
policies,  say  for  ten  years,  and  pay  the  agent's 
commission  upon  one  premium,  upon  the  first  an- 
nual premium  for  the  whole  policy,  thus  effecting 
a  saving  of  nine  years'  commissions  to  agents.  The 
insured  would  receive  the  benefit  by  the  decrease 
of  expense.  Some  provision  could  be  made  for 
wear  and  tear  or  deterioration  in  value  and  thus 
perhaps  some  reduction  of  the  expense  might  be 
accomplished  without  recourse  to  legislation. 


1046 

In  life  insurance,  the  amount  paid  for  the  pro- 
curement of  business  is  extraordinary.  It  is  com- 
monly known  that  some  companies  in  competition 
pay  as  high  as  one  hundred  per  cent. ,  or  the  whole 
amount  of  the  first  premium,  for  commissions,  and 
an  annual  renewal  commission  on  subsequent  pay- 
ments made  by  the  insured.  What  is  true  in  tire 
insurance  is  also  a  fact  in  life  insurance  and  that 
is,  that  after  calculating  the  mortuary  and  reserve 
elements  of  the  premium,  a  large  loading  is  added 
for  expenses  and  it  is  claimed  that  the  expense  of 
obtaining  the  business  has  grown  so  large  that  a 
policy  must  remain  in  force  two  and  three  years  to 
repay  the  excess  of  expense  taken  out  of  the  sur- 
plus belonging  to  the  older  policy-holder.  The 
agents'  commissions  should  not  be  paid  wholly  out 
of  the  first  annual  premium,  for  the  reason  that  such 
a  course  operates  unjustly  upon  the  other  policy- 
holders. Not  to  exceed  fifty  per  cent,  should  be 
permitted  to  be  deducted  from  the  first  annual  pre- 
mium and  the  balance,  if  any,  cast  upon  the  second. 
If  there  could  be  brought  about  a  competition  of 
economy  of  management  in  life  insurance,  it  would 
be  a  great  and  bountiful  blessing  to  our  people.  It 
would  tend  to  the  extinction  of  unsafe  assessment 
insurance  companies  and  would  so  popularize  life 
insurance  that  thousands  and  tens  of  thousands 
would  avail  themselves  of  the  opportunity  to  invest. 


1047 

In  looking  over  the  vast  and  complicated  field  of 
life  insurance  for  a  remedy  to  alleviate  this  diffi- 
culty, it  strikes  me  that  the  law  is  the  only  power 
which  can  be  successfully  appealed  to  in  the  matter 
and  there  should  be  State  and  National  legislation 
curbing  the  wanton  and  extravagant  expenditure 
of  moneys  for  agents'  commissions  in  life  insur- 
ance. The  amount  to  be  paid  should  be  limited  by 
law.  What  that  amount  should  be,  I  have  no  data 
at  present  to  determine,  but  in  my  humble  opinion 
it  should  not  exceed  fifty  per  cent,  of  the  first  an- 
nual premium.  The  reduction  of  commissions  to 
fifty  per  cent,  of  the  first  annual  premium  would 
reduce  cost  of  life  insurance  by  giving  greater  re- 
turns to  the  policy-holder. 

It  is  a  well-known  fact  that  in  fire  insurance  at 
least  ten  or  twelve  per  cent,  of  the  premium  is  ex- 
pended by  the  companies  for  rating  and  adjust- 
ment expenses.  The  reason  is  that  each  company 
employs  its  own  agents  to  perform  this  service, 
Co-operation  by  insurance  companies  would  lead 
to  a  vast  saving  in  this  branch  of  their  manage- 
ment. Possibly  a  State  board  of  rating  and  ad- 
justment would  solve  this  problem,  cut  off  the  ex- 
pense entirely,  guarantee  fair  rating  and  ad- 
justment, remove  all  question  of  unfair  dealing 
with  the  rate  and  loss,  make  insurance  more  popu- 
lar and  cheaper. 


1048 

The  greed  of  agents  for  large  commissions,  gave 
rise  to  insurance  beyond  value.  The  insurer  found 
after  a  fire  that  he  had  paid  premiums  on  a  large 
amount  of  insurance,  but  that  he  had  received  but 
a  small  proportion  of  it  even  in  the  case  of  total  de- 
struction. In  Wisconsin,  the  remedy  applied  was 
the  valued  policy  law  which  provides  as  follows  : 
''  Whenever  any  policy  of  insurance  shall  be  writ- 
ten to  insure  real  property  and  the  property  in- 
sured shall  be  wholly  destroyed,  without  criminal 
fault  on  the  part  of  the  insured  or  his  assigns,  the 
amount  of  the  insurance  written  in  such  policy 
shall  be  taken  conclusively  to  be  the  true  value  of 
the  property  when  insured  and  the  true  amount 
of  loss  and  measure  of  damages  when  destroyed." 

It  is  a  maxim  in  fire  insurance  that  the  honest 
insurer  must  and  actually  does  pay  toward  the 
losses  caused  by  incendiarism.  It  is  claimed  that 
the  latter  occasions  a  large  percentage  of  the  losses 
which  is  undoubtedly  true  if  ofllcial  reports  can  be 
relied  upon.  There  is  no  provision  on  the  statute 
books  of  Wisconsin  by  which  the  cause  of  fires  are 
officially  investigated.  Some  local  provisions  in 
some  of  the  cities,  the  watchfulness  of  the  com- 
panies' agents  alone  stand  guard  to  detect  the 
frauds  thus  committed.  While  this  law  protects 
the  honest  insurer,  is  it  not  on  the  other  hand  a 
constant  menace  to  the  companies  ?    It  certainly 


1049 

does  not  encourage  that  carefulness  nor  preserva- 
tive effort  so  essential  to  the  prevention  of  fire. 
The  knowledge  of  the  certain  payment  of  the  full 
amount  of  the  insurance  in  case  of  total  destruc- 
tion is  not  calculated  to  foster  e.ven  common  and 
ordinary  care  but  rather  indifference  on  the  part  of 
the  insured.  It  is  difficult  to  prove  criminal  in- 
tent. That  is  equivalent  to  proof  of  arson,  and 
that  every  judge  and  jurist  knows  is  the  most 
elusive  crime  on  the  statute  book.  Passivity, 
carelessness,  in  most  cases  equal  in  result  to  actual 
intentional  burning,  does  not  come  within  the 
meaning  of  such  a  statute.  The  law,  I  am  con- 
vinced, is  unjust,  and  should  be  repealed.  Its 
protective  features  are  entirely  overbalanced  by 
its  viciousness  in  encouraging  that  condition  of 
affairs  which  morally,  if  not  legally,  amounts  to 
incendiarism.  Insurance  is  and  should  constantly 
be  indemnity  pure  and  simple.  Actual  loss  only 
should  be  compensated.  If  there  has  been  over- 
insurance,  it  is  in  almost  every  case  as  much  the 
consequence  of  fraudulent  speculation  on  the  part 
of  the  insurer  as  the  unscrupulousness  of  the  in- 
surance agent.  As  a  solution  of  this  matter  I 
would  suggest  in  case  of  a  total  destruction,  the 
payment  under  any  policy  of  the  actual  loss,  /.  ^., 
the  value  of  the  property  destroyed,  to  be  deter- 
mined by  adjustment,  arbitration  or  action  at  law. 


1050 

not  to  exceed  the  face  of  the  policy.  Should  the 
amount  awarded  be  less  than  the  face  of  the  policy 
the  proportionate  amount  of  the  premium  actually 
paid  on  the  excess  of  insurance  to  be  refunded  with 
interest  on  every  payment  from  the  time  it  was 
made  to  the  time  of  the  loss.  This  would  wipe 
out  the  speculative  feature^  cure  over-insurance, 
operate  strongly  against  incendiarism,  and  cause 
the  exercise  of  a  higher  degree  of  care,  and  would 
also  compel  every  fire  insurance  company  to  pay 
the  actual  loss. 

While  it  may  be  possible  that  many  of  the  errors 
and  defects  existing,  a  few  of  which  I  have  en- 
deavored to  mention,  may  be  remedied  by  State 
legislation,  I  am  much  inclined  to  the  conviction 
that  the  subject  of  insurance  could  be  most  effectu- 
ally regulated  by  national  supervision.  The  import- 
ance of  this  matter  has  not  as  yet  come  to  be  real- 
ized by  our  national  law-makers.  Other  pressing 
questions  of  national  policy  have  crowded  these 
vast  interests  to  the  rear.  The  money  question, 
the  recent  war  with  Spain  and  the  resulting  prob- 
lems of  surpassing  national  importance  will  con- 
tinue to  engage  the  time  of  our  officials  and  repre- 
sentatives. But  this  subject  should  be  agitated 
continuously,  its  great  value  to  the  citizens  of  our 
country  made  known  so  that,  when  in  the  course  of 
time  an  opportunity  for  its  consideration  arrives, 


1051 

it  may  be  thoroughly  understood  to  the  end  that 
all  of  our  people  may  enjoy  the  blessings  of  a  just 
and  enlightened  national  insurance  code. 


THE  POSSIBILITIES  OF  NATIONAL 
SUPERVISION. 


JOHN  A.  FINCH  : 

PIFTY  years  ago  the  aggregate  amount  of  out- 
-'•  standing  insurance  was  not  one  per  cent,  of  the 
amount  now  outstanding.  The  idea  was  conceived 
nearly  fifty  years  ago  that  the  State  should  exercise 
supervision  over  insurance  companies  unlike  that 
applied  to  any  other  business.  It  became  popular 
after  its  possibilities  came  to  be  understood,  and  is 
now  as  firmly  fixed  in  the  legislation  of  the  States 
as  is  any  other  legislative  subject. 

Supervision  of  insurance  companies  has  come  to 
stay.  If  the  question  were  original  I  am  free  to 
say  I  would  not  favor  it  in  any  of  its  essentials, 
beyond  a  compulsory  showing  of  the  condition  of 
the  companies,  to  be  sworn  to  by  the  officers  under 
pains  and  x)enalties  of  perjury.  If  such  super- 
vision had  for  its  sole  object  the  protection  of  policy- 


1053 

holders,  and  it  was  still  thought  essential  to  have 
some  novel  law  to  make  insurance  companies  safe, 
I  would  suggest  that  if  three  of  the  chief  officers 
were  required  to  personally  take  a  detailed  statement 
of  the  condition  of  their  company  to  each  State 
where  they  intend  doing  business,  and  there  make 
oath  to  the  correctness  of  the  statement,  I  would 
have  greater  faith  in  a  company  than  is  warranted 
under  the  present  system.  The  certainty  of  in- 
dictment in  Wisconsin  of  the  officers  making  oath 
to  a  false  statement  as  to  the  condition  of  their 
company  and  extradition  there  for  trial  for  perjury, 
would  be  quite  enough  to  make  them  careful  to 
make  their  statements  speak  the  truth.  But  such 
a  suggestion  is  fantastical,  though  it  can  find  its 
parallel  in  the  legislation  of  the  States  here  and 
there  found  in  their  statute  books. 

Let  this  be  said  for  supervision  as  it  has  been 
exercised,  and  in  view  of  its  results,  considering 
the  extraordinary  powers  given  to  heads  of  insur- 
ance departments  :  It  has  been  far  below  its  possi- 
bilities in  the  way  of  making  supervision  burden- 
some. Supervision  is  by  no  means  a  snare  and 
delusion,  and  the  supervisors  have  been  moderate, 
and  have  carefully  endeavored  to  discharge  their 
duties  for  the  interests  of  the  State  as  announced 
in  the  legislation  creating  their  offices.  They  have 
been  and  are  honest,  though  not  always  wise.     The 


1054 

fact  that  a  very  few,  be  it  said,  of  these  officials 
have  been  derelict,  should  not  be  considered  in  an 
estimate  of  the  mass.  Be  it  said  for  them  that 
they  are  administrative  officers  whose  duty  it  is  to 
enforce  certain  legislation  of  their  States.  Criti- 
cism of  the  legislation  should  not  be  allowed  to 
necessarily  include  criticism  of  the  supervisors. 

At  the  session  of  the  French  Academy  in  1856, 
M.  De  Broglie  said :  '"  Whatever  opinion  may  be 
held  about  the  natural  and  political  character  of 
the  Eighteenth  Brumaire,  that  event  was  a  piece  of 
good  fortune  to  France.  Everything  relating  to  it 
may  be  exaggerated  save  the  good  service  it  ren- 
dered." 

In  a  qualified  way  this  may  be  said  of  State 
supervision  of  insurance  companies.  While  it  has 
been  burdensome  and  expensive  to  an  almost  in- 
tolerable degree,  and  in  sporadic  cases  exasperat- 
ing, yet  there  have  grown  up  under  it  the  strongest 
insurance  corporations  in  the  world.  American 
insurance  companies,  and  particularly  life  insur- 
ance companies,  command  confidence  throughout 
the  civilized  world.  Who  can  say  that  this  has 
not  become  possible  because  of  supervision  ?  It  has 
prevented  or  throttled  many  a  sham,  though  it  has 
not  always  been  alert  enough  to  detect  them  all. 

The  forty-five  States  have  nearly  all  insurance  de- 
partments, or  a  department  with  similar  powers  as 


1055 

an  adjunct  to  some  other  department  of  State  govern- 
ment. Each  State  has  its  own  schedule  of  taxes,  fees, 
fines,  penalties,  obligations  and  prohibitions,  and  a 
retaliatory  or  reciprocal  provision,  enabling  it  to 
meet  the  highest  charges  any  other  State  may  re- 
quire of  companies  of  other  States.  A  compilation 
of  these  various  provisions,  as  originally  enacted, 
and  as  keyed  up  under  strict  application  of  retali- 
tory  laws,  would  be  a  curious  presentation.  The 
retaliatory  law  has  never  been  enforced  in  any  State 
to  its  utmost  possibilities.     It  never  will  be. 

Of  all  powers  granted  to  the  heads  of  insurance 
departments,  the  visitorial  power  is  most  frequently 
under  criticism.  The  executives  of  a  company  who 
have  nothing  to  fear  from  the  extremist  application 
of  the  visitorial  power,  save  the  intolerable  annoy- 
ance that  would  follow,  dread  and  distrust  supervis- 
ion. The  executives  of  a  company  who  are  not  so 
buttressed,  who  have  reason  to  fear  the  result  of 
an  application  of  the  visitorial  power,  dread  it  as 
an  obstruction. 

Be  supervision  good  or  bad,  in  theory  or  practice, 
there  is  certainly  no  necessity  for  its  frequency. 
There  was  never  such  an  illustration  of  "  damnable 
iteration." 

It  may  be  fairly  stated  that  there  is  not  a  mana- 
ger of  an  insurance  company,  no  matter  what  its 
character,  or  policy-holder  who  understands  how 


1056 

the  cost  of  insurance  is  affected  by  such  operations, 
who  does  not  ardently  hope  for  a  change  in  the 
system  which  prevails.  If  one  department  could 
be  created  by  Congress  with  all  of  the  necessary 
powers  now  exercised  by  the  forty-live  States,  it 
would  be  an  immense  saving  to  the  policy-holders 
and  an  additional  guard  for  the  solvency  of  the 
companies.  That  the  managers  of  the  companies 
could  better  perform  their  duties  as  managers- 
when  under  supervision  of  but  one  department, 
rather  than  under  the  supervision  of  forty-five  de- 
partments, needs  no  argument. 

The  primary  proposition  of  supervision  and  of  all 
insurance  legislation  was  originally  in  the  supposed 
interest  of  the  policy-holders.  The  effort  was  to 
determine  if  the  company  was  solvent  by  statutory 
tests.  So  many  things  have  been  added  to  this  in- 
tention that  supervision  is  now  given  a  seat  along- 
side of  the  executives  of  the  companies.  It  wants 
to  know,  and  the  thirst  for  information  is  never 
satisfied.  Just  what  Prussia  required  of  our  life 
insurance  companies  that  they  were  unwilling  to 
do  is  not  definitely  known  outside  of  the  offices  of 
the  companies  affected.  In  time  we  will  possibly 
have  the  Prussian  idea  and  it  will  go  hard, 
but  we  will  better  the  example.  The  require- 
ment of  the  head  of  one  of  the  insurance  de- 
partments for  the  statement  of    the  salaries  re- 


1057 

ceived  by  the  officers  of  each  of  the  insurance 
companies,  was  met  by  a  general  objection.  It 
has  seemed  to  me  that  such  a  requirement  was  in 
exact  accord  with,  or  at  least  not  worse  in  principle 
than  many  other  requirements  that  are  uncomplain- 
ingly complied  with.  What  interest  an  official  or 
a  policy-holder  in  a  stock  company  paying  no  divi- 
dends to  policy-holders  can  have  in  the  amount  of 
salaries  paid,  is  not  clear.  There  is  a  semblance  of 
a  right  to  make  this  demand  in  many  of  the  queries 
of  the  modern  blanks. 

The  primary  and  ostensible  purpose  of  the  crea- 
tion of  the  insurance  departments  of  the  States 
was,  as  stated,  for  the  protection  of  the  policy- 
holders. In  fact,  and  herein  lies  the  chief  reason 
of  the  tenacity  with  which  the  States  will  hold  out 
for  the  present  system,  supervision  is  but  a  device 
for  taxation.  Millions  are  collected  every  year 
under  this  machinery  and  but  a  small  part  of  the 
sum  collected  has  any  relation  to  any  test  of  solv- 
ency of  the  companies.  The  collections  are  for 
licenses  to  agents,  for  other  service  to  the  com- 
panies, and  by  way  of  charge  on  the  premium  re- 
ceipts. The  average  of  the  collections  of  all  the 
States  is  in  excess  of  two  per  cent,  of  the  gross  re- 
ceipts of  the  companies.  A  very  little  figuring 
will  show  how  large  a  fund  is  taken  from  the  com- 
panies by  the  States. 


1058 

There  are  forty-five  States  in  this  Union  of 
States.  In  every  one  of  these  States  there  is  legis- 
lation in  more  or  less  stringent  terms,  the  purpose 
of  which  is  to  so  supervise  the  regular  "Old 
Line"  companies  as  to  enable  policy-holders  to 
feel  secure.  The  contracts  of  the  orders  and  asso- 
ciations are  rarely  subjected  to  legislative  guards. 
Despite  this  legislation,  there  have  been  failures, 
more  or  less  disastrous  to  policy-holders,  in  all 
kinds  of  insurance  companies  and  of  all  kinds  of 
associations.  The  companies  that  were  required 
to  provide  a  reserve  that  have  failed,  failed  be- 
cause of  gross  dishonesty  or  because  of  incompe- 
tency, that  is  even  worse,  in  the  management. 
The  orders  and  associations  that  were  not  required 
to  maintain  a  reserve  that  have  failed,  have  failed 
because  of  inherent  defect  in  the  system,  hastened 
in  cases  by  incompetency  and  dishonesty. 

The  State  cannot  provide  a  law  that  will  make 
managers  of  insurance  companies  honest,  nor  can 
it  make  a  law  to  stay  the  advancing  mortality  of 
advancing  age,  or  lessen  the  law  of  averages 
applied  to  like  conditions. 

Over  each  of  these  insurance  departments  there 
is  an  officer  who  is  given  powers  so  loosely  defined, 
or  so  vaguely  understood,  that  the  incumbent  in 
cases  claims  to  have,  and  to  a  degree  exercises,  an 
authority  more  nearly  approaching  that  known  in 


1059 

the  countries  with  no  law  but  the  will  of  the  ruler 
than  is  approached  anywhere  else  in  the  law-gov- 
erned world. 

Primarily  and  theoretically  such  an  officer  must 
be  under  mandate  to  admit  no  company,  to  his 
State  which  cannot  be  shown  by  statutory  tests  to 
be  solvent,  and  by  the  same  tests  he  can  refuse 
admission  to  no  company  unless  restrained  by  di- 
rect enactment  or  by  some  ingenious  application  of 
the  far-reaching  retaliatory  law. 

The  form  of  contract  (except  where  there  has 
been  statutory  interference)  is  for  the  company  and 
the  policy-holders.  The  liability  of  the  company 
in  case  of  rejected  claim  under  a  policy  is  for  the 
courts  to  decide.  When  the  law  as  to  taxation  or 
any  obligation  is  not  clear  beyond  controversy,  the 
courts  are  open  to  hear  and  determine  what  the 
right  may  be.  Such  would  be  the  rule  in  all  other 
departments  as  affecting  all  other  classes  of  corpor- 
ations ;  but,  by  an  interpretation,  not  exclusively 
modern,  as  has  been  assumed,  the  official  in  charge 
of  the  insurance  department  has  or  assumes  to 
have  sole  discretion  and  final  decision  upon  such 
matters  in  many  of  the  States. 

In  proof  we  have — but  it  is  needless  to  say  in 
this  presence  and  to  this  audience  what  we  have. 
Suffice  it  to  suggest  that  companies  are  ousted  for 
not  paying  disputed  claims ;  they  are  ousted  for 


1060 

not  paying  taxes  which,  by  previous  interpreta- 
tion, were  not  held  to  be  due ;  they  are  ousted  or 
threatened  with  ouster  for  alleged  sins  of  omission 
and  commission  without  number.  The  very  air 
has  beeft  burdened  with  report  of  clashes  between 
companies  and  departments  as  to  construction  of 
the  insurance  laws. 

Not  only  have  such  powers  been  claimed  and 
exercised,  but  by  authority  granted  by  statute, 
companies  are  subject  to  examination  by  any 
official  or  his  deputy  of  any  one  of  the  forty-five 
States,  under  penalty  of  expulsion  for  refusal  to 
submit  at  the  will  of  the  officer,  and  this  power 
has  been  many  times  in  the  past,  as  well  as  in  the 
present,  exercised  when  there  seemed  no  possible 
ground  to  fear  the  company  it  was  exercised  upon 
was  insolvent. 

The  head  of  an  insurance  department  is  the  only 
official  to  whom  is  granted  this  power  of  visitation 
in  such  unlimited  view.  The  power  of  visitation 
has  been  revived  in  the  legislation  of  the  States 
affecting  insurance  companies,  and  given  a  scope 
never  conceived  of  in  the  monarchies  where  it 
originated  centuries  ago. 

The  situation  of  the  insurance  companies  as  fixed 
by  the  legislation  of  the  country  is  about  as  unsat- 
isfactory as  it  could  well  be. 

Here,  then,  is  the  situation.     Forty-five  States 


1061 

Jiaving  forty-five  insurance  codes  that  vary  in  value 
and  viciousness  with  the  wisdom  and  ignorance 
that  framed  them.  From  the  standpoint  of  the 
insurance  companies  they  are  an  unmixed  good 
and  a  mixed  evil. 

There  is  throughout  the  country  a  vast  and 
increasing  army  of  discontents  with  life  insurance 
made  up  of  the  discontinued  policy-holders.  The 
public  has  slight  knowledge  of  the  legislative 
burdens  thus  resting  on  the  companies,  and  this 
public,  which  is  in  close  touch  with  and  made  up 
in  large  number  of  the  malcontents,  looks  smil- 
ingly on  at  such  a  situation,  and  the  persistent 
policy-holders  foot  the  enormous  bills. 

Shall  this  situation  go  on  forever  ?  An  affirma- 
tive answer  could  come  from  the  despairing  pessi- 
mist who  can  see  no  hope  ahead.  A  negative 
answer  could  come  from  the  perspiring  optimist, 
who  thinks  he  can  see  hope  ahead,  but  can  not 
give  much  reason  for  his  faith. 

State  supervision  is  not  satisfactory.  The  insur- 
ance legislation  of  the  country  is  not  satisfactory. 
The  whole  system  should  be  fairly  put  upon  trial 
before  the  country  with  an  intelligent  jury  as 
arbiter.  The  country  must  come  to  see  that  there 
are  not  two  parties  with  conflicting  interests  that 
are  affected  by  legislation.  The  insurance  com- 
panies are  the  policy-holders  of  the  companies — no 


1062 

one  else  is  interested.  What  there  is  in  legislation 
affecting  the  companies  that  is  harmful  or  helpfu. 
to  the  companies  is  harmful  or  helpful  to  the 
policy-holders,  and  to  them  only.  They  are  the 
companies.  They  foot  the  bills,  and  in  its  last  an- 
alysis State  supervision,  as  we  have  it,  is  most 
objectionable  because  it  is  expensive  to  the  policy- 
holders. 

The  personal  annoyance  the  managers  of  the 
companies  suffer  is  compensated  for  -it  in  their 
salaries.  These  and  all  bills  of  whatever  sort  the 
policy-holders  pay. 

Supervision  by  State,  or  by  some  authority,  has 
come  to  stay.  It  is  deepening  its  hold  on  our 
legislation  every  year.  The  present  question  is, 
*'  Who  shall  exercise  it  ?  "  Shall  forty-live  States 
do  what  could  better  be  done  by  one  ?  Can  Con- 
gress create  a  department  that  will  relieve  the 
situation  ?  In  other  words,  what  are  the  possibili- 
ties 6t  National  Supervision  ? 

From  the  moment  I  accepted  the  invitation  to 
present  a  paper  upon  this  subject,  I  have  given  as 
much  attention  to  the  question,  looking  at  it 
purely  as  a  legal  question,  as  I  could.  For  six 
months  it  has  been  constantly  in  my  mind.  I  have 
again  read  the  expressions  of  the  Supreme  Court  of 
the  United  States  that  bear  upon  the  powers  of 
Congress,  and  the  powers  of  the  States  that  would 


1063 

be  invoked  or  affected  by  the  creation  of  a  Na- 
tional Bureau. 

I  have  come  to  the  conclusion  that  under  these 
decisions  the  power  of  the  States  is  supreme,  and 
that  a  corporation  outside  of  the  State  of  its  in- 
corporation, and  particularly  if  it  happen  to  be  an 
insurance  company,  is  almost  in  the  condition  of 
Dred  Scott  after  the  Supreme  Court  of  the  United 
States  had  fixed  his  status,  as  given  in  the  popular 
summary,  "A  negro  has  no  rights  that  a  white 
man  is  bound  to  respect." 

It  is  told  of  Wisconsin's  great  Senator,  Carpenter, 
who  Avas  a  lawyer  upon  the  highest  test  of  that  ex- 
acting profession,  that  he  was  given  a  large  fee  for 
an  opinion  as  to  the  constitutionality  of  a  law 
which  most  serioiisly  affected  a  great  business  in- 
terest. It  was  desired  that  the  law  should  be  held 
to  be  unconstitutional.  It  w^as  expected  that  he 
would  be  able  to  secure  an  opinion  from  a  great 
court  declaring  that  the  law  was  not  constitutional. 
He  labored  many  weeks  on  the  case,  and  in  the 
end,  after  a  thorough  examination  of  the  kind 
such  as  his  matchless  mind  was  capable  of,  he  wrote 
sententiously  to  his  expectant  client :  ' '  The  law 
is  constitutional ;  you  can  not  overcome  it." 

During  my  examination  of  the  question  pre- 
sented, I  have  been  many  times  upon  the  point  of 
disposing  of  it  about  as  summarily,   by   saying, 


1064 

** There  is  no  possibility  for  State  supervision;" 
but  I  am  not  quite  ready  to  so  conclude.  Most 
certainly,  under  the  decisions  of  the  Supreme 
Court  of  the  United  States  and  of  the  courts  of  the 
various  States  that  have  spoken,  there  is  no  relief 
possible  without  legislation,  and  possibly  not  with- 
out a  constitutional  amendment. 

This  decision  is  arrived  at  upon  as  careful  a  re- 
view as  I  am  capable  of  giving  of  the  decisions  of 
the  Supreme  Court  of  the  United  States,  which 
must  be  conclusive  upon  the  subject. 

It  has  seemed  to  me,  and  I  say  it  with  diffidence, 
that  there  is  a  possible  flaw  or  vice  running  through 
all  of  these  decisions.  They  are  pronounced  with- 
out consideration  of  the  fact  that  the  conditions 
under  which  the  constitution  was  created  have 
changed.  If  immediately  upon  the  adoption  of  the 
constitution  the  court  had  been  required  to  pass 
upon  all  of  the  cases  from  Paul  vs.  Virginia  to 
Hooper  vs.  California,  the  decisions  would  have 
been  in  harmony  with  the  then  existing  conditions. 

In  one  of  his  great  arguments  before  the  Supreme 
Court  of  the  United  States,  Webster  said  the  con- 
stitution must  be  read  and  interpreted  in  the  light 
of  advancing  events. 

This  view  of  Mr.  Webster  seemed  to  find  expres- 
sion in  the  opinion  of  the  Supreme  Court  in  Pensa- 
cola  Tel.  Co.  vs.  Western  Union  Tel.  Co.  (6  Otto, 


1065 

1) :  "The  powers  of  Congress  thus  granted  are 
not  confined  to  the  instrumentalities  of  commerce, 
or  the  postal  service  known  or  used  when  the  con- 
stitution was  adopted,  but  they  keep  pace  with  the 
progress  of  the  country,  and  adapt  themselves  to 
the  new  developments  of  time  and  circumstances. 
They  extend  from  the  horse  with  its  rider  to  the 
stage-coach,  from  the  sailing  vessel  to  the  steam- 
boat, from  the  coach  and  the  steamboat  to  the  rail- 
road, and  from  the  railroad  to  the  telegraph,  as 
these  new  agencies  are  successively  brought  into 
use  to  meet  the  demands  of  increasing  population 
and  wealth.  They  were  intended  for  the  govern- 
ment of  the  business  to  which  they  relate  at  all 
times  and  under  all  circumstances.  As  they  were 
entrusted  to  the  general  government  for  the  good 
of  the  nation,  it  is  not  only  the  right,  but  the  duty 
of  Congress  to  see  to  it  that  intercourse  among  the 
States  and  the  transmission  of  intelligence  are  not 
obstructed  or  unnecessarily  encumbered  by  State 
legislation." 

But  I  doubt  if  the  Court,  without  an  act  of  Con- 
gress, will  admit  that  this  expression  applies  to  the 
insurance  business. 

All  the  cases  in  which  the  character  of  the  busi- 
ness of  insurance  has  been  considered  by  the 
Supreme  Court  of  the  United  States,  whether  as 
commerce  or  not,  from  Paul  vs.  Virginia,  75  U.  S., 


1066 

168,  to  Hooper  vs.  California,  154  U.  S.,  648,  have 
distinctly  held  that  insurance  is  not  commerce,  and, 
therefore,  not  within  the  protection  of  the  Federal 
Constitution.  This  is  as  firmly  established  as  any- 
thing that  has  ever  been  before  the  United  States 
Supreme  Court. 

A  review  of  the  decisions  of  the  Supreme  Court 
of  the  United  States  upon  the  extent  to  which  the 
States  may  regulate  commerce  is  not  encouraging. 
That  Court  has  gone  from  point  to  point,  often  re- 
tracing its  steps,  and  again  varying  so  far  from 
earlier  standards  that  one  might  wonder  if  there  is 
anything  in  commerce  that  may  not  be  relieved 
from  federal  protection  and  turned  over  wholly  to 
the  regulation  of  the  States  by  act  of  Congress. 

A  rule  may  be  deduced  from  the  later  expression 
of  the  Court  that  Congress  may  {vide  opinion  in 
construing  the  Wilson  Bill,  which  practically  re- 
moved intoxicating  liquors  from  the  protection 
given  to  other  articles  of  commerce,  in  re  Rahrer, 
140  U.  S.,  545),  by  an  enactment  relegate  any  par- 
ticular article  of  commerce  wholly  to  State  regula- 
tion. A  bill  was  passed  by  the  lower  house  and 
sent  to  the  Senate  so  affecting  oleomargerine. 
Under  the  Rahrer  opinion  tiiis  will  let  this  product 
enter  a  State  only  at  the  will  of  the  State,  and 
upon  such  terms  as  may  be  imposed. 

The  situation  may  be  thus  summarized:  With- 


1067 

out  legislation  by  Congress  all  commerce  must  be 
freer  and  untrammeled,  but  when  Congress  so  de- 
clares as  to  any  particular  article,  this  freedom 
ceases.     Indeed,  the  Court  says  :  * 

''When  Congress  acted  at  all  the  result  of  its 
action  must  be  to  operate  as  a  restraint  upon  that 
perfect  freedom  which  its  silence  insures.  Congress 
has  now  spoken,  and  declared  that  imported 
liquors  or  liquids  shall,  upon  arrival  in  a  State,  fall 
within  the  category  of  domestic  articles  of  a  similar 
nature.  ^  *  *  Congress  did  not  use  terms  of 
permission  to  the  State  to  act,  but  simply  removed 
an  impediment  to  the  enforcement  of  the  State  laws 
in  respect  to  imported  packages  in  their  original 
condition,  created  by  the  absence  of  a  specific  ut- 
terance on  its  part.  It  im]3arted  no  power  to  the 
State  not  then  possessed,  but  allowed  imported 
property  to  fall  at  once,  upon  arrival,  within  the 
local  jurisdiction." 

That  is  to  say  (and  it  seems  a  surprising  thing  to 
say),  that  Congress  may  declare  the  Constitution  of 
the  United  States  inoperative  in  so  far  as  that 
sacred  instrument  protects  commerce  between  the 
States.  All  State  laws  that  were  confessedly  regu- 
lations of  commerce  upon  subjects  national  in  their 
character  were  inoperative  and  void  under  the 
Constitution  as  construed  by  the  Court,  until 
Congress  should  say  that  any  article  of  commerce 


1068 

should  be  relieved  from  the  constitutional  protec- 
tion. 

It  has  been  said  that  ''Speech  is  silver,  but 
silence  is  golden.''  Surely  here  is  an  illustration 
where  silence  is  golden.  It  cannot  hardly  be  said 
that  this  sort  of  ''speech  "  is  silver.  "  Speech  "  of 
this  sort  would  seem  to  be  of  a  far  more  debased 
metal. 

There  are  possibly  crumbs  of  comfort  for  those 
who  ardently  desire  National  Supervision  of  in- 
surance companies  in  reflecting  on  this  status.  If 
Congress  can  say  that  an  article  confessedly  within 
the  protection  of  the  commerce  section  of  the  Con- 
stitution shall  no  longer  have  such  protection,  it 
may  be  said  by  way  of  deduction  or  corollary  that 
Congress  may  do  the  converse — may  dechire  an 
article  or  an  act  to  be  within  the  protection  of 
the  commerce  section,  which  the  Supreme  Court 
of  the  United  States  has  said  was  not  within  that 
protection. 

I  have  thought  that  possibly  the  vice  of  the  de- 
cision in  the  Dred  Scott  Case  may  underlie  these 
decisions,  or,  at  least,  many  of  them,  upon  the 
commerce  clause  of  the  constitution.  There  is  no 
more  learned  decision  nor  one  more  impregnable 
from  its  premises  than  that  given  by  the  Supreme 
Court  of  the  United  States  in  the  Dred  Scott  Case. 
The  summary  of  the  case,  as  understood  by  the 


1069 

country,  was  that  a  negro  had  no  rights  which  the 
white  man  was  bound  to  respect.  The  trouble  of 
the  decision  was  that  it  failed  to  interpret  the  con- 
stitution by  any  light  not  burning  when  the  con- 
stitution was  adopted.  A  paper  written  by  a  tal- 
low dip  need  not  be  restricted  to  such  a  light  when 
those  for  whom  it  was  written  come  to  read  it. 
The  constitution  was  adopted  "to  form  a  more 
perfect  union"  between  the  States.  It  could 
hardly  be  said,  or  accepted  if  said,  that  this  meant 
that  it  was  "  to  form  a  more  perfect  union"  under 
exactly  the  conditions  in  the  social  and  businsss 
world  then  prevailing.  Under  new  conditions  in 
the  social  and  business  world  a  more  perfect  union 
between  the  States  could  only  exist  by  a  larger 
and  freer  interpretation  of  the  constitution  than 
would  have  been  required  when  it  was  adopted. 
The  only  fault  in  Chief  Justice  Taney's  otherwise 
admirable  opinion  is  that  he  says  the  constitution 
must  be  interpreted  by  the  conditions  existing 
when  it  was  adojjted.  That  fault  led  to  a  logical 
conclusion.  The  question  presented  in  effect  was 
this :  Is  a  negro  a  human  being  ?  If  he  were 
human  he  was  within  the  decisive  expression  of 
the  Declaration  of  Independence  that  all  men  are 
created  equal.  The  conscience  of  the  North  was 
awakened  and  foand  expression.  The  South, 
fairly  astounded  at  the  expressions  of  the  North, 


1070 

saw  that  a  union  between  the  States  holding  views 
antagonistic  to  the  spirit  of  the  Dred  Scott  opinion 
could  not  last,  and  submitted  the  question  and  all 
questions,  lateral  and  collateral,  direct  and  corol- 
lary, to  the  arbitrament  of  the  sword.  Slavery 
could  not  exist  if  the  decision  in  the  Dred  Scott 
Case  was  not  the  law  of  the  land.  The  North  re- 
fused to  believe  that  it  was  the  law  of  the  land. 
In  the  contest  that  followed  the  sword  prevailed, 
and  the  Dred  Scott  Case  was  overruled.  It  was 
not  overruled  by  the  Thirteenth,  Fourteenth  and 
Fifteenth  Amendments.  They  were  simply  an  ex- 
pression recording  of  the  opinion  of  the  country. 
Whatever  the  framers  of  the  constitution  thought 
of  slavery  was  of  no  matter  at  the  end  of  the  Civil 
War.  That  militant  period  decided  that  it  did 
not  mean  that  any  being  should  be  tree  from  the 
absolute  protection  of  the  law.  The  blood  shed  on 
many  a  lield  and  the  solemn  end  at  Appomattox 
was  conclusive  on  the  final  issue  in  the  forum  of 
the  conscience  of  the  nation.  Judge  Taney  is  con- 
demned for  his  opinion  only  in  the  minds  of  the 
ignorant  and  the  prejudiced.  His  argument  and 
his  conclusions  are  impregnable  if  his  premises 
(which  might  be  summarized  to  be  that  there  is  no 
higher  law  than  that  whatever  is  is  right)  were 
accepted.  He  said  the  constitution  must  be  inter- 
preted by  the  light  of  conditions  existing  when  it 


1071 

was  adopted.  By  this  all  change  in  the  public 
mind  and  all  changes  made  imperative  by  changed 
conditions  must  be  disregarded. 

If  ever  a  Supreme  Court  of  the  United  States 
should  sit  which  will  fully  accept  Webster's  view 
as  to  the  proper  construction  of  the  constitution, 
it  is  possible  that  the  vast  interests  made  safe  by 
the  contracts  of  the  insurance  companies  may  be 
held  to  be  within  the  protection  of  the  present  con- 
stitution. If  this  may  not  come  to  pass  it  will  re- 
quire a  constitutional  amendment  before  there  is 
any  possibility  of  JN'ational  Supervision. 

I  would  welcome  an  effort  that  would  test  the 
right  of  Congress  to  enact  a  law  creating  a  bureau 
under  one  of  the  departments,  that  would  so 
change  the  present  system  of  having  forty-five 
bureaus  doing,  or  attempting  to  do,  what  one 
efficient  bureau  could  better  do.  Such  a  bureau 
could  only  affect  companies  doing  interstate  busi- 
ness. It  would  not  affect  the  States  in  their  regu- 
lation and  supervision  of  local  companies.  Such 
a  bureau  would  be  a  vast  saving  to  the  policy- 
holders, and  should  afford  them  a  greater  protec- 
lion  than  they  now  have.  Would  such  a  law  be 
constitutional?  Upon  this  the  Supreme  Court 
would  have  to  pass.  The  educational  effect  of  the 
passage  of  such  a  law,  even  if  it  be  declared  un- 
constitutional, would  be  very  valuable.     The  mere 


1072 

effort  to  procure  the  passage  of  sucli  a  law  would 
be  educational.  If  the  people  and  policy-holders 
shall  ever  come  to  see  that  they  are  suffering  vast 
and  needless  expense  by  reason  of  present  legisla- 
tion, supposedly  in  their  interest,  there  would  be 
hope  for  a  change  in  our  legislation  by  congres- 
sional action,  by  modification  of  State  statutes 
affecting  companies,  or  by  the  creation  of  a  public 
sentiment  that  would  be  as  effective  as  legislation 
to  remove  many  of  the  existing  evils  so  loudly 
complained  of.  There  is  more  hope  now  for  fair 
legislation  than  at  any  time  in  the  past.  The 
liberalizing  of  the  life  insurance  policy  contract 
has  vastly  decreased  litigation,  and  there  is  with- 
out question  a  better  feeling  now  towards  the  life 
insurance  companies  in  the  public  at  large  than 
has  ever  before  been  known.  Occasionally,  how- 
ever, there  is  presented  a  case  in  the  Courts  that 
offends  the  idea  of  justice.  Such  a  case  in  the 
hands  of  a  legislator  smarting  under  an  injustice 
some  widow  has  suffered,  will  do  more  harm  than 
is  easily  computed,  or  may  be  easily  averted. 
Every  lawyer  having  a  practice  in  this  class  of 
cases  can  cite  an  illustration.  Such  an  illustration 
should  not  be  permitted.  Every  dollar  paid  to  a 
life  insurance  company  should  purchase  a  dollar's 
worth  of  insurance.  No  shrewd  construction  of  a 
contract  that  would  deprive  a  policy-holder  of  a 


1073 

right  once  paid  for,  should  be  indulged  in.  A 
company  should  be  as  sedulous  to  protect  the 
rights  of  its  policy-holders  as  it  is  eager  to  induce 
them  to  assume  that  relation.  I  suggest  this,  in 
passing,  as  one  way  to  bring  about  a  better 
feeling  in  the  legislative  and  judicial  mind 
toward  life  insurance  companies. 

The  effort  to  free  Dred  Scott  failed,  but  it  was 
the  beginning  of  a  movement  that  resulted  in  the 
freedom  of  all  slaves.  An  effort  to  establish  a  Na- 
tional Bureau  for  the  regulation  of  interstate  in- 
surance may  fail  at  the  beginning.  In  the  ef- 
fort and  failure  the  insuring  public  may  come 
to  understand  the  situation,  and  in  the  end  confes- 
sedly cumbrous  and  expensive  systems  will  be  so, 
far  modifed  that  relief  will  come  that  will  go  far  to 
alleviate  the  situation. 


In  the  presentation  of  this  paper  I  submitted 
the  following  query  blank  to  every  Insurance 
Commissioner  or  Superintendent,  and  to  every 
like  ex-official  for  the  last  twenty  years  whose 
address  I  could  learn  : 

Please  answer  as  fully  as  you  can  conveni- 
ently the  following  inquiries : 

1.  During  what  period  were  you  in  charge  of 
the  Insurance  Department  of  your  State  ? 


1074 

2.  Supposing  a  law  creating  a  National  Bu- 
reau for  Insurance  Supervision  to  be  constitu- 
tional, do  you  favor  such  a  law  ? 

3.  What  advantage  would  such  a  Bureau 
be,  in  your  opinion,  to  policy-holders,  and  what 
to  the  companies  ? 

4.  Can  you  give  an  estimate  of  the  saving 
to  the  companies,  that  is  to  their  policy- 
holders, in  matter  (1)  of  fees  to  officials,  and 
(2)  of  taxes  to  the  State,  should  a  National  Bu- 
reau assume  to  do  the  work  now  done  by  the 

"Insurance  Department  of  your  State  ? 

5.  What  is  the  average  annual  expense, 
in  your  State,  for  the  supervision  of  insurance 
companies  ? 

6.  If  you  have  any  definite  views  on  the  sub- 
ject of  National  Supervision,  as  to  its  advisa- 
bility or  desirability  on  any  account,  you  will 
confer  a  favor  if  you  will  give  expression  on 
the  subject. 

The  following  officials    favor    National    Super- 
vision : 

William  A.  Fricke Wisconsin. 

C.  C.  Parks Colorado. 

L.  C.  Campbell South  Dakota. 

The  following  oppose  National  Supervision  : 
Walter  S.  White Alabama. 


1075 

Clay  Sloan Arkansas. 

F.  Albert  Kurtz Maryland. 

Milo  D.  Campbell Michigan. 

Elmer  H.  Dearth Minnesota. 

Ed.  T.  Orear Missouri. 

John  F.  Cornell Nebraska. 

F.  B.  Fancher North  Dakota. 

C.  W.  Brownell Vermont. 

C.  G.  Heifner Washington. 

L.  M.  LaFollette West  Virginia. 

The  following  are  in  doubt  or  express  no  opin- 
ion : 

Clay  Sloan Arkansas. 

0.  R.  Fyler Connecticut. 

A.  C.  Daily Indiana. 

1.  W.  Carr Maine. 

Fred'k  L.  Cutting Massachusetts. 

John  C.  Linehan New  Hampshire. 

George  Wurts New  Jersey. 

•  Wm.  Bettle " 

Louis  F.  Payn New  York. 

Cyrus  Thompson North  Carolina. 

W.  S.  Matthews Ohio. 

A.  C.  Landers Rhode  Island. 

H.  R.  Kincaid Oregon. 

James  H.  Lambert Pennsylvania. 

Albert  C.  Landers Rhode  Island 

Morton  Marye Virginia. 


1076 

The  following  ex  officials  favor  National  Super- 
vision : 

A.  W.  Files Arkansas. 

D.  W.  Kinksley Colorado. 

Geo.  B.  Luper Pennsylvania. 

James  C.  Collins. Rhode  Island. 

The  following  ex-officials  do  not  favor  National 
Supervision : 

Louis  B.  Schwanbeck Colorado. 

Albert  W.  Paine .* Maine. 

S.  H.  Rhodes Massachusetts. 

C.  P.  Ellerbe Missouri. 

The  officials  and  ex-officials  of  other  States  did 
not  respond. 
.    The  following  are  some  of  the  answers  received  : 

Louis  B.  Schwanbeck,  who  was  in  charge  of  the 
Colorado  Department  during  the  years  1889  and 
1890,  answers  the  sixth  query  as  follows  ; 

'*  I  am  in  favor  of  uniform  laws  by  all  the  States 
and  Territories  and  think  it  can  be  accomplished, 
but  a  national  law  and  bureau  must  ultimately  be- 
come a  machine  in  favor  of  a  few  large  corpora- 
tions and  drive  smaller  concerns  to  the  wall. 

**I  am  absolutely  opposed  to  the  present  mode 
of  examinations,  as  has  been  practiced  by  a  few 
Western  Commissioners  upon  their  attempts  to 
harass  Eastern  concerns.     I  am  a  thorough  West- 


1077 

erner,  but  do  not  approve  of  such  methods.  The 
New  York  law  on  examinations  is  good  and  should 
be  adopted  throughout  the  land." 

C.  C.  Parks,  Commissioner  of  Colorado  Insur- 
ance Department  from  1895  to  1897,  says  : 

''All  kinds  of  insurance,  'fire,  life,  etc.,  are  taken 
by  our  most  frugal  citizens.  They  should  not  be 
required  to  pay  an  unjust  proportion  of  the  States' 
and  iS'ation's  expenses." 

Albert  W.  Paine,  the  first  Commissioner  of  the 
State  of  Maine,  being  appointed  in  1868,  expresses 
himself  as  follows  : 

''  I  was  appointed  Bank  and  Insurance  Examiner 
of  this  State  in  March  1868,  under  a  statute  en- 
acted on  the  7th  of  that  month,  the  existence  of 
which  was  not  then  known  to  me.  That  was  the 
first  law  ever  passed  in  this  State  on  the  general 
subject  of  insurance,  and  was  very  defectively 
drawn.  Having  thus  received  the  appointment  I 
concluded  to  accept  it  and  provide  for  the  wsfnts  by 
originating  a  statute  covering  the  whole  subject. 
The  leisure  hours  of  the  ensuing  year  were  largely 
devoted  to  the  work,  with  the  result  of  the  enact- 
ment of  a  statute  creating  the  Insurance  Depart- 
ment, with  provisions  for  its  government,  which 
went  into  force  on  July  1,  1870.  Having  been  ap- 
pointed Commissioner,  the  following  three  years 
were  largely  devoted  to  the  work  of  organization 


1078 

and  government,  when  my  successor  found  all 
things  ready  for  his  use. 

''During  the  first  year  of  my  administration  the 
Hon.  George  W.  Miller,  then  Insurance  Commis- 
sioner of  New  York,  originated  the  idea  of  a  Na- 
tional Insurance  Convention  to  regulate  the  business 
of  insurance  throughout  the  Union  and  adopt  uni- 
form rules  for  its  government.  At  his  invitation  I 
readily  entered  into  the  work  with  him,  and  at  our 
first  meeting,  on  the  24th  day  of  May,  1871,  I  had 
the  honor  of  being  appointed  presiding  officer  of 
the  convention  to  effect  its  organization.  The  work 
which,  as  a  convention,  was  done  at  that  and  the 
next  session  for  the  promotion  of  the  business  of 
insurance  throughout  the  whole  country  can  not  be 
fully  appreciated  except  by  those  who  at  that  time 
had  a  knowledge  and  experience  of  insurance  com- 
panies and  their  mode  of  operation.  The  quarter 
of  a  century  which  has  since  elapsed  bears  pleasing 
evidence  of  the  great  work  which  was  performed, 
the  annual  reports  of  the  different  Insurance  De- 
partments of  the  several  States  of  the  Union  being 
in  themselves  witnesses  thereto.  The  rules  and 
regulations  then  adopted  are  still  found  every- 
where pregnant  on  their  manifold  pages  in  all  the 
States. 

**The  facts  and  experience  thus  presented  afford 
to  my  mind  a  conclusive  answer  to  the  questions 


1079 

submitted  in  your  circular  as  to  the  establishing 
of  a  National  Bureau  of  Government  Insurance 
Supervision.  My  answer  is  most  emphatically  in 
the  negative,  and  that  too  for  various  reasons.  In 
the  first  place,  I  cannot  see  in  our  National  Con- 
stitution any  authority  for  Congress  to  assume  any 
such  work.  It  cannot  be  derived  from  the  provis- 
ion which  gives  Congress  authority  to  enact  laws 
regulating  interstate  commerce  and  none  other 
provision,  as  it  seems  to  me,  gives  any  such  power 
as  that  now  suggested.  And  besides,  XJongress,  as 
a  general  rule,  is  not  composed  of  members  having 
any  particular  knowledge  of  insurance  matters, 
and  hence  as  a  body  cannot  be  rationally  selected 
to  make  rules  or  exercise  authority  to  govern  the 
subject.  On  the  contrary,  the  insurance  conven- 
tion is  composed  of  members  every  one  of  whom  is 
naturally  educated  to  the  work.  Better  by  far  to 
let  the  whole  subject  remain  as  it  is,  for  the  aggre- 
gate meeting  of  the  different  Insurance  Commis- 
sioners, or  their  substitutes,  to  provide  rules  t6v 
the  government  and  regulation  of  the  business  as 
has  been  the  case  for  the  quarter  of  a  century  since 
they  began.  The  harmony  which  my  own  obser- 
vation has  convinced  me  has  uniformly  prevailed 
at  the  annual  meetings,  speaks  loudly  in  favor  of 
continuing  the  convention  as  it  has  thus  far  pre- 
vailed,   its  decisions  having  been   uniformly  en- 


1080 

forced  without  any  conflict  of  sentiment  or  action 
either  among  the  members  or  by  the  public.  Its 
success  in  the  past  may  be  relied  upon  as  an  assur- 
ance for  the  future.  Let  the  present  well-enough 
alone — let  things  stay  as  they  are,  free  from  all 
congressional  or  other  interference." 

'*I  write  this  on  my  86th  birthday  and  in  my 
64th  year  of  continuous  practice  at  the  bar,  and 
that  too,  while  subject  to  interruption  by  callers 
on  professional  business  at  my  office  desk,  upon 
which  I  am  now  exercising  my  pen. 

A.  W.  P." 

Aug.  16,  1898. 

S.  H.  Rhodes,  Commissioner  of  Massachusetts 
from  1874  to  1879,  says  : 

"  So  long  as  insurance  companies  are  created  by 
State  legislation  having  charters  subject  to  altera- 
tion, amendment  or  repeal,  and  subject  also  to  all 
laws  which  are  or  may  hereafter  be  in  force,  re- 
lating to  such  corporations,  I  think  National 
Supervision  is  impracticable." 

Milo  J).  Campbell,  Commissioner  for  Michigan, 
says: 

**  While  I  feel  there  is  necessity  for  federal  laws, 
I  do  not  believe  there  is  any  more  necessity  for 
federaljsuper vision  to  supersede  State  supervision, 
than  for  national  railroad  supervision  to  supersede 
State  supervision." 


1081 

Elmer  H.  Dearth,  Commissioner  for  Minnesota, 
does  not  believe  that  National  Supervision  should 
supersede  State  Supervision  ;  that  even  though  a 
National  Bureau  of  Insurance  was  established,  the 
States  would  not  relinquish  their  right  to  super- 
vise insurance  companies  within  their  respective 
borders  and  to  require  payment  of  licenses,  taxes, 
etc. 

Ed.  T.  Orear,  Superintendent  for  Missouri,  for 
answer  to  the  sixth  query,  sends  copy  of  open 
letter  to  the  editor  of  Tfte  Standard^  dated  Decem- 
ber 30,  1897,  strongly  opposing  National  Super- 
vision. 

C.  P.  Ellerbe,  who  was  Superintendent  of  the 
Insurance  Department  of  Missouri  from  1889  to 
1893,  says  : 

''  I  am  opposed  to  National  Supervision  primarily 
because  I  believe  it  unconstitutional.  If  constitu- 
tional, I  do  not  see  how  it  could  benefit  either  the 
companies  or  the  policy-holders.  In  my  opinion  it 
would  simply  impose  an  additional  burden  upon 
insurance  companies.  Under  State  Supervision 
policy-holders  are  better  protected  than  are  de- 
positors in  national  banks  under  feieral  super- 
vision." 

John  F.  Cornell,  Auditor  of  State  of  Nebraska, 
ex-oflBicio  Commissioner,  says  : 

"'  State  supervision  and  examination  of    State 


1082 

banks  is  much  more  satisfactory  to  our  people  than 
supervision  of  national  banks.  Insurance  litiga- 
tion before  judges  appointed  for  life  will  be  worse 
thj^n  before  elected  judges  for  the  people." 

George  B.  Luper,  who  was  Deputy  Insurance 
Commissioner  of  Pennsylvania  from  1884  to  1890, 
and  Insurance  Commissioner  from  1890  to  1895, 
says : 

*'2.  I  am  heartily  in  favor  of  National  Super- 
vision, if  the  same  be  constitutional. 

"3.  The  advantages  to  be  derived  from  such  a 
Bureau  are  too  numerous  to  mention  in  the  space 
of  a  letter.  Briefly  stated,  they  are  :  (a)  An  abso- 
lute uniformity  of  all  requirements,  (b)  Better 
protection  to  the  policy-holders,  (c)  Relief  from 
constant  changes  of  Insurance  Supervisors,  (d) 
Lessened  expense  to  the  companies  ;  hence  to  the 
policy-holders. 

''4.  I  believe  that  National  Supervision,  if  it 
can  be  obtained  in  any  way,  can  be  done  through 
a  statute  drawn  something  after  the  form  of  our 
National  Banking  Act,  without  any  attempt  what- 
ever to  regulate  the  companies  now  in  existence 
under  charters  granted  by  their  respective  States. 
Such  a  law  should  provide  for  the  creation  of  a 
bureau  and  for  the  incorporation  and  regulation  of 
national  insurance  corporations,  defining  their 
rights,  powers,  privileges  and  duties  in  the  United 


1083 

States.  It  should  also  provide  for  the  reincorpora- 
tion of  any  insurance  company  now  in  existence  on 
the  tenns  and  conditions  npon  which  a  new  com- 
pany may  be  organized,  and  when  such  company 
is  so  reincorporated,  it  shall  have  all  the  rights, 
powers  and  privileges,  and  be  subjected  to  the 
same  restriction  as  if  it  were  originally  incor- 
porated as  a  national  association  or  company.  In 
this  way  State  Supervision  is  not  touched,  and 
those  companies  which  do  not  desire  to  be  nation- 
ally supervised  are  not  forced  into  that  position. 

"On  first  blush  this  strikes  me  as  the  most 
feasible  plan  of  IS'ational  Supervision,  and  one 
which,  I  think,  will  prove,  when  worked  out  in  all 
its  details,  to  be  of  great  value  to  the  insuring 
public  and  to  the  companies." 

James  C.  Collins,  Commissioner  for  Rhode 
Island  from  1863  to  1868,  in  answer  to  the  query  as 
to  whether  he  favored  iN"ational  Supervision,  says  : 
"  Most  decidedly  I  do." 

L.  C.  Campbell,  Commissioner  for  South 
Dakota,  says  that  he  favors  National  Supervision 
for  the  reasons — 

"1.  Would  have  a  tendency  for  better  insur- 
ance and  more  satisfaction  to  policy-holders  with 
better  managed  companies. 

*'2.  The  saving  to  companies  and  to  policy- 
holders would  be  incalculable.     I  have  no  informa. 


1084 

tion  which  gives  the  amount  that  has  been  taken 
from  insurance  companies,  by  so-called  Insur- 
ance Commigrsioners,  because  of  their  authority, 
and  in  return  with  but  little  good  to  any  body 
other  than  themselves.  It  would  not  necessarily 
affect  the  taxes  due  the  State,  unless  it  would  add 
to  the  receipts  of  the  State  because  of  a  less 
amount  assumed  by  the  Commissioner  of  the 
State. 

"3.  I  am  in  favor  of  National  Supervision 
because  of  a  more  efficient  service  rendered  to  the 
companies,  with  very  much  less  expense,  which 
would  lessen  the  cost  of  insurance  to  policy-holders 
with  more  confidence  in  the  concern  in  which  they 
might  be  holding  a  policy  ;  a  very  important  item 
to  be  considered,  and  would  save  the  country  of 
many  concerns  that  are  not  now  founded  on  good 
business  principles.  I  am,  therefore,  heartily  in 
favor  of  National  Supervision  of  Insurance  in  this 
country." 

C.  W.  Brownell,  of  Vermont,  writes  that  he  does 
not  favor  National  Supervision : 

**  That  is,  I  do  not  believe  in  the  centralizing 
of  power  at  the  National  Capital  when  the  States 
should  or  can  manage  their  own  business.  *  *  * 
The  States  would  need  to  maintain  a  department 
to  manage  the  domestic  companies  over  which  the 
national  government  could  have  no  control." 


1085 

C.  G.  Heifner,  Deputy  Commissioner  of  Insur- 
ance for  Washington,  writes : 

"  Replying  to  your  favor  of  the  3()th  ult.  request- 
ing an  opinion  from  this  department  on  the  subject 
of  National  Supervision  of  Insurance  Companies, 
I  beg  to  say  that  theoretically  it  commends  itself 
to  our  judgment,  and  ultimately  I  hope  to  be  able 
to  support  the  proposition. 

' '  There  is  no  denying  the  fact  that  in  the  final 
analysis  the  assured  must  pay  all  losses  and  ex- 
penses incurred  by  insurance  companies.  It  is 
equally  conclusive,  I  think,  that  the  proposed  sys- 
tem of  supervision,  if  honestly  executed,  would 
tend  to  lower  insurance  rates  by  decreasing  ex- 
penses, while  the  ratio  of  losses  to  premiums 
would  remain  substantially  the  same  as  if  under 
State  supervision.  I  am  considering  this  proposi- 
tion on  the  assumption  that  it  is  not  to  be  made  a 
means  of  raising  revenue  for  the  support  of  the 
government.  Enough  should  be  collected  to  pay 
the  expense  of  conducting  the  Bureau,  and  no 
more.  At  present  the  total  fees  and  taxes  col- 
lected by  the  States  from  the  insurance  companies 
constitute  no  small  item  of  the  total  expenses  in- 
curred by  the  companies.  If  this  item  is  elimi- 
nated, then,  to  that  extent,  could  rates  be  reduced 
to  the  assured  ;  and  competition  would  force  rates 
down  to  an  equitable  basis  for  both  the  insurer 


1086 

and  the  assured  if  the  companies  keep  aloof  from 
the  unnatural  combinations  for  controlling  rates. 

"lam  opposed  to  the  prevalent  and  unreason- 
able tolls  imposed  by  the  various  States  upon  in- 
surance companies  in  the  form  of  annual  fees  and 
taxes  on  premiums.  This  is  a  method  of  indirect 
taxation  collected  from  that  portion  of  the  people 
whose  lives  and  property  are  insured.  The  care- 
less and  thoughtless  property  owner ;  the  worse 
than  useless  and  unproductive  speculator  in  unim- 
proved lots  or  acreage  entirely  escape  from  fur- 
nishing their  ^proportionate  share  of  the  govern- 
ment revenues  as  well  as  being  a  hindrance  to  pro- 
gress and  internal  development.  The  industrious 
and  thoughtful  citizen  whose  efforts  are  given  to 
the  protection  of  his  family  and  to  the  erection  of 
buildings  and  making  improvements,  and  the  re- 
sult of  whose  labors  adds  something  to  the  sum 
total  of  the  wealth  of  the  world,  is  made  to  pay  an 
additional  tax  because  he  has  created  something, 
while  the  speculator  in  unimproved  land  goes  free, 
but  whose  property  is  enhanced  in  value  as  a  re- 
sult of  the  other's  labors.  This  method  of  raising 
revenue  is  as  unfair,  as  unjust  and  as  iniquitous  as 
is  the  present  governmental  system  of  taxation  very 
properly  called  by  its  beneficiaries  a  protective 
tariff.  In  both  cases  the  man  upon  whose  shoul- 
ders the  burden  falls  heaviest  believes   himself 


1087 

free.  We  seem  to  enjoy  being  robbed,  provided 
only  it  be  done  while  our  back  is  turned.  It  is 
thus  that  exorbitant  fees  and  taxes,  as  well  as  pro- 
tective tariffs,  became  popular  among  the  less  in- 
telligent of  our  people.  The  duty  of  collecting 
taxes  from  the  people  and  then  turning  them  over 
to  the  government  to  pay  its  running  expenses 
does  not  come  within  the  purpose  for  which  insur- 
ance companies  were  organized.  The  whole  sys- 
tem should  be  abolished  root  and  branch,  and  by 
so  doing  we  not  only  assist  in  ridding  ourselves  of 
an  unjust  system  of  taxation,  but  we  will  reduce 
insurance  rates  as  well. 

' '  Again,  National  Supervision  of  Insurance  ap- 
peals to  me  because  of  the  trouble  and  expense  to 
which  companies  are  subjected  in  complying  with 
the  conflicting  statutes  of  forty-five  States  and 
several  Territories.  With  few  exceptions,  when 
an  insurance  comxDany  commences  business  in  one 
State  it  soon  endeavors  to  extend  its  busi- 
ness in  every  State  in  the  Union.  We  are  one 
Nation,  one  people  and  have  one  common  destiny, 
and  if  a  company  is  strong  enough  and  solvent 
enough  to  protect  the  property  owner  from  fire  in 
California,  in  Texas  or  in  Massachusetts,  it  is 
strong  enough  to  protect  the  property  owners  in 
Washington.  An  exhaustive  examination  by  one 
competent  and  honest  supervisor  should  subserve 


1088 

the  interests  of  all  our  people.  These  briefly  seem 
to  me  to  be  the  chief  reasons  in  support  of  National 
Supervision. 

''  What  has  been  said  in  support  of  this  proposi- 
tion may  not  in  the  minds  of  many,  outweigh  any 
objections  urged  against  it ;  nevertheless,  at  the 
risk  of  being  considered  pessimistic,  I  shall  en- 
deavor to  give  'cause  for  the  faith  that  is  in  me.' 

''  I  have  ever  been  a  consistent  advocate,  except 
in  extraordinary  cases,  of  that  tenet  of  the  consti- 
tution which  declares  that  '  the  powers  not  dele- 
gated to  the  United  States  by  the  constitution,  nor 
prohibited  by  it  to  the  States,  are  reserved  to  the 
States  respectively,  or  to  the  people.'  It  must  be 
apparent  to  all  that  the  tendency  of  these  later 
years  is  to  the  centralization  of  governmental  pow- 
ers. The  moneyed  interests,  the  gigantic  trusts 
and  combines  have  supported  this  tendency,  know- 
ing that  governments  far  removed  from  the  people 
are  less  apt  to  be  responsive  to  their  needs  or 
amenable  to  their  demands.  Our  forefathers,  with 
prophetic  vision,  evidently  foresaw  this,  and  wisely 
safeguarded  the  States  by  vouchsafing  to  the  in- 
habitants thereof  local  self-government.  I  have 
faith  in  the  intelligence,  the  integrity  and  the 
patriotism  of  the  people,  and  want  the  government 
close  to  ihem.  National  Supervision  is  undeniably 
away  from  the  people,  and  another  step  toward  the 


1089 

centralization  of  power,  and  to  that  extent  I  oppose 
it  strongly. 

"Another  reason,  and  perhaps  the  stronger, 
why  I  withhold  my  assent  to  this  proposition  at 
the  present  time,  is  my  disinclination  to  lodge  in 
one  man  such  great  and  far-reaching  authority. 
Instances  are  not  wanting  to  point  out  the  dangers 
lurking  in  the  exercise  of  such  vast  powers.  Men 
of  previous  unquestioned  integrity,  once  invested 
with  power,  have,  yielded  to  its  inherent  tempta- 
tions. Official  peculation  by  a  Secretary  of  War 
under  Grant ;  the  Credit  Mobilier  scandals  ;  the 
Star  Route  frauds,  and  the  pecuniary  profits  and 
dereliction  of  duties  by  the  head  of  the  last  admin- 
istration are  unimpeachable  proof  of  either  official 
favoritism  or  personal  dishonesty  in  the  discharge 
of  sacred  responsibilities.  A  man  who  will  use 
money  to  purchase  votes  to  secure  his  own  nomina- 
tion for  the  presidency  of  the  United  States  is  unfit 
to  be  the  Secretary  of  War  of  a  free  people  in  time 
of  peril.  So  also  is  a  man  convicted  of  bribery  by 
the  Senate  of  his  own  State  unfit  to  be  a  Senator  of 
the  United  States. 

"Only  a  few  days  ago  the  government  sold 
$200,000,000  of  United  States  bonds.  When  the 
time  came  to  deliver  these  bonds  to  the  subscribers 
therefor,  the  Secretary  of  the  Treasury,  discredit- 
ing a  co-ordinate  branch  of  the  governmental  serv- 


logo 

ice,  entered  into  a  contract  with  the  United  States 
Express  Company,  whose  president  is  a  prominent 
United  States  Senator,  for  the  delivery  of  these 
bonds.  The  '  New  York  Financier '  brings  a  strong 
indictment  against  the  Treasury  Department  for 
this  transaction,  and  among  other  things  says  : 

*''What  excuse  the  government  will  make  for 
an  action  which  in  private  business  would  be 
deemed  suicidal,  is  not  known.  If  it  confesses  that 
it  is  afraid  to  trust  bonds  to  the  mails^  after  having 
for  years  invited  the  public  to  forward  valuables  in 
that  manner,  it  stands  convicted  of  fraud.  If  it 
still  maintains  that  the  mails  afford  an  absolutely 
safe  carriage  for  money  and  securities,  its  position 
is  not  more  tenable.  The  incident  is  one  that 
demands  investigation,  and  Congress  will  not  be 
doing  its  duty  if  it  allows  the  matter  to  pass  un- 
noticed.' 

-'  The  above  is  quoted  to  show  that  even  one  of 
those  responsible  for  the  enthronement  of  the 
moneyed  influence  in  the  affairs  of  government 
occasionally  catches  a  glimpse  of  the  drift  of 
thins^s.  Yet  we  seem  absolutely  oblivious  to  the 
gravity  of  such  flagrant  and  criminal  offenses  on 
the  part  of  men  in  high  official  station.  Indeed, 
such  conduct  is  either  condoned  by  editors, 
preachers  and  teachers,  or,  what  is  more  deplora- 
ble^  is  openly  defended  by  these  men,  the  tenure  of 


1091 

wliose  positions  in  most  instances  depends  on  their 
ability  and  willingness  to  inculcate  error  and  false 
theories  of  government  in  the  minds  of  our  youth. 

"  More  might  be  said,  but  I  shall  not  prolong 
this  letter,  though  evidence  scarcely  without  limit 
might  be  adduced  of  the  shameless  disregard  of 
the  people's  interests  by  officials  charged  with 
solemn  obligations  who  are  in  touch  with  the  ener- 
vating  influences  of  Wall  Street.  And,  notwith- 
standing the  objections  here  urged,  the  time  may 
come  when  the  proposition  under  consideration 
will  command  our  approval.  That  time  will  come, 
however,  only  when  the  standard  of  official  integ- 
rity and  honor  on  the  part  of  our  federal  officials  is 
so  high  that  no  citizen  shall  have  just  cause  to 
believe  that  we  have  wandered  from  the  paths  of 
virtue  and  rectitude  marked  out  by  the  fathers  of 
the  Republic  ;  when  another  Jackson  standing  like 
a  Colossus  and  invincible  against  the  combined 
forces  of  the  money  power,  shall  again  sit  in  the 
presidential  chair.  When  that  time  comes  I  shall 
give  my  support,  small  though  it  be,  to  the  plan  of 
controlling  insurance  companies  by  JNational 
Supervision,  nor  ask  for  a  better." 

L.  M.  LaFollette,  of  West  Virginia,  disapproves 
of  National  Supervision.     He  says  : 

'•Your  favor  of  July  the  30th  was  duly  received 
at  this  office,  but  for  some  reason  was  misplaced, 


1092 

and  for  that  reason  has  received  no  reply.  The 
supervision  of  insurance  in  this  State  is  one  of  six 
branches  of  this  office.  I  regard  it  as  very  import- 
ant, and  for  that  reason  have  given  it  considerable 
attention. 

''In  my  judgment,  it  will  be  very  unwise  for 
Congress  to  pass  any  law  looking  to  the  National 
Supervision  of  Insurance  Companies.  I  do  not 
believe  that  it  can  do  so  under  the  Constitution. 

"  Without  going  into  a  discussion  of  the  subject, 
allow  me  to  say  that  the  reasons  advanced  in  its 
favor  are,  in  my  judgment,  without  weight,  and 
there  are  many  strong  arguments  against  it.  The 
National  Government  should  certainly  have  noth- 
ing to  do  with  matters  that  can  be  controlled  by 
the  States." 


1 


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